“A reverse mortgage has its benefits, but it’s an expensive way to borrow money and not without risks.” — John Schaub, author, “Building Wealth One House at a Time” (2nd edition)
Like you, I’ve seen a lot of ads promoted by prominent TV personalities, such as Henry Winkler (“Happy Days”), Tom Selleck (“Blue Bloods”) and Alex Trebek (“Jeopardy!”), encouraging you to get a “reverse mortgage.”
They make it sound appealing to seniors. Live in your primary home for the rest of your life without making a monthly mortgage payment ever again!
Essentially, a reverse mortgage is a special kind of home equity loan that replaces your traditional mortgage. The new loan pays off your first mortgage, and creates a new, bigger loan. Interest rates can be fixed or variable. You can take the money in a lump sum, a steady stream of monthly advances or a line of credit. The funds from the reverse mortgage are tax free — you don’t have to pay income taxes on borrowed funds. The key is that you don’t have to pay off the principal and interest like you normally do unless you sell the house or move out. In fact, the borrower (you) has no personal liability if the loan exceeds the value of the house at some point.
So how does the bank get paid? One possibility is that the mortgage lender resells the reverse mortgage after capturing the origination fee. Alternatively, if the mortgage lender holds onto it, heirs may be asked to pay back the entire loan plus interest upon the death of the mortgage holder, or the bank can sell the house and get its money back.
It all sounds pretty good, especially for retirees who are strapped for money and would like to tap the equity in their home.
What are the limits and pitfalls?
You have to be at least 62 years old to qualify for this Federal Housing Administration (FHA)-insured loan (officially called a “Home Equity Conversion Mortgage”). You need to have equity in the house, where the appraised value of the house is more than the first mortgage. Closing costs do apply and include appraisal fees, title insurance and high origination fees (many banks will finance the closing costs so out-of-pocket expenses can be minimal).
The costs of a reverse mortgage are higher than those of a standard mortgage. Interest rates on the reverse mortgage are slightly higher than traditional mortgages as well, and there’s a 1.25% annual fee for the mortgage insurance premium imposed by the FHA.
As the homeowner, you will have to continue to pay real estate taxes, insurance and maintenance costs on the house. If you run out of money, the lender may foreclose on you.
The biggest headache for a reverse mortgage may be when you die or decide to sell or move out of your primary residence. John Schaub, my real estate expert and author of the bestseller book “Building Wealth One House at Time,” says that he has received several distraught calls recently from heirs who have inherited houses encumbered with reverse mortgages that become payable at the death of the borrower.
“Unless they can refinance the house or sell it quickly and net more than the amount of the mortgage, they lose the house,” Schaub said.
In sum, reverse mortgages offer opportunity for some senior homeowners, but they are expensive. There is no free lunch.
You Blew It! Can We Afford to Ignore North Korea?
One thing that could derail the bull market on Wall Street, and the American way of life, is another major war in the Middle East or Asia. It could come from Islamic terrorists, or perhaps from Kim Jong-un, who I’ve often thought of as a mere “saber rattler” to obtain aid (food and oil) and concessions from the West.
But now I wonder if Kim Jong-un is enough of an evil megalomaniac that he could someday start a nuclear war. Certainly our Western leaders never seem to take him seriously enough to shut him down. Is he a paper tiger, or a growing threat who will eventually shock the world?
The United States has gone to great lengths to stop Iran from developing a nuclear weapon, but it seems to allow North Korea to get away with its nuclear program with impunity. Under the brazen dictatorship of Kim Jong-un, this tiny communist nation has the ability to deliver nukes from both land and sea which now can reach the United States’ mainland. Yet, there have been no meaningful sanctions, no military options on the table and no calls for regime change.
The fact is that North Korea is a puppet of China. Overall, it probably serves China’s overall strategy to have an “unstable” leader in North Korea. If Kim Jong-un initates an invasion of South Korea (he has ten times the troops that the United States and South Korea have), he will be viewed as a madman, and China won’t be held responsible. Yet, it will allow China to fulfill its treaty obligations to protect North Korea, and a full scale world war could be on our hands. It is not a pleasant thought, but one we should seriously consider given the gradual escalation of threats and military capabilities of this crazy Communist leader.
John Schaub’s New Edition of “Building Wealth One House at a Time”
I am happy to announce that John Schaub, my favorite real estate guru, has just released a new second edition of his bestseller, “Building Wealth One House at Time.” It includes new chapters on real estate bubbles, crashes and cycles. Schaub is the only real estate guru I know who has survived and prospered for 40 years in this wild-and-woolly market. He specializes in buying single-family homes and renting them for positive cash flow — and he has made millions of dollars doing so. His book tells you how to buy homes cheaply, attract good renters and take advantage of all the tax benefits. For more information, go to www.johnschaub.com. The book’s retail price is $30, but you pay only $16, plus shipping and handling, if you order the book from Amazon.
In case you missed it, I encourage you to read my e-letter column from last week about the unexpected benefits of price discrimination. This article, and many other past Investor CAFE columns, can be found on StockInvestor.com, new home of Eagle Daily Investor. I invite you to bookmark the site and follow it on Facebook and Twitter.
Good investing, AEIOU,
O “Investing in Art & Rare Tangible Assets Seminar,” New York, New York, Oct. 24-25: The Oxford Club, led by investment writer extraordinaire Alex Green,will be hosting a special two-day seminar on investing in art and collectibles. I’ve just been added to the program to speak on “Investing in Rare Financial Books for Fun and Profit.” I’ve been a collector of rare financial books for years, and have profited handsomely. (I’ll also reveal my secret way to save 20-30% off all artwork and collectibles.) Other speakers include Geoff Anandappa and Richard Gladdle, of Stanley Gibbons, to discuss rare coins and stamps…James Forsyth on investing in wine… and Marsha Malinowski and Clive Moss on investing in fine books and manuscripts. The seminar will include a private tour of the Metropolitan Museum of Art by its President Daniel Weiss, and a visit to Sotheby’s. What fun! For more information, please click here or contact Oxford Voyager Club Concierge Kiara Laughran by phone at 443.708.9411 or by email at firstname.lastname@example.org. She will be happy to help you.
O New Orleans Investment Conference, Oct. 26-29, Hilton Hotel: I’ve been speaking at the New Orleans conference since the late 1970s, and I consider it the “granddaddy of investment conferences.” If you haven’t been to New Orleans, it’s a great city with five-star restaurants, beautiful music (jazz) and fun things to do. At the conference, I’ll be moderating the economy panel with Peter Schiff, Stephen Mooreand Peter Boockvar, chief market analyst for the Lindsey Group. Other speakers include Dennis Gartman, Charles Krauthammer, Marc Faber, James Grant, P. J. O’Rourke, Doug Casey, Adrian Day, Pamela and Mary Ann Aden, Brien Lundin, Robert Prechter and Rick Rule. To sign up at a discount, call 1-800-648-8411, or click this link.