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House rich ... and cash poor.

People over age 65 control a significant portion of this country's wealth, but much of it is concentrated in the equity in their homes. Based on their income, if Social Security benefits are excluded, just under half of all senior citizens and many individuals with disabilities would fall below the poverty line. Inflation continues to drive up the cost of food, energy, and, particularly, healthcare.

Federal budget cuts have pushed the cost of many programs down to state and local governments, driving up sales taxes and property taxes. These taxes, particularly sales, tend to be regressive and really clobber retired people living on Social Security and limited resources.

The problem seems intractable. Seniors and some folks with disabilities no longer work, and if they returned to work they probably would not be in high-paying positions. So, an increase in income through additional labor is unlikely. Without more earnings from labor, additional savings will be all but impossible.

Possible Solutions

Increasing the investment return on their savings may solve the problem for some seniors and people with disabilities. However, many are unwilling to and should not accept the risk associated with higher returns. Even if some want to accept the greater risk, their resources may be too meager for an increased return to make a difference. The only available asset may be their homes, which many seniors and people with disabilities own free and clear. Enter the "reverse mortgage."

Reverse mortgages literally are mortgage loans that work backward. They also seem to violate most of the traditional principles of good lending practice--but more on that later. Under a reverse mortgage, instead of sending a check to the lender every month to pay interest and reduce debt, the borrower receives a check every month from the lender and has his or her debt increase.

Risky Business?

Reverse mortgages vary from lender to lender, but most have several characteristics in common.

First, they are generally available only to senior citizens (a "senior" may vary from 62 to 70 years of age) or others in special situations who own their own homes with little or no debt. Next, the type of loan is usually either term (based on the life expectancy of the homeowner or a certain length of time) or a line of credit.

The amount of the monthly payment depends on the term of the loan, interest rates, the home's value, and the percentage of current equity eligible to be loaned out. With a line of credit arrangement, there is no monthly check; the person merely taps it for cash whenever necessary. Generally the loan is not repaid until the house is sold or at death.

The risks to the lender are obvious. With a loan based on life expectancy, they could loan more than they will be able to recover on sale. There is no current cash inflow. Given these and other disadvantages, its no wonder that lenders have not been flocking to offer reverse mortgages.

The Federal Housing Administration (FHA) has a loan-guarantee program for reverse mortgages; however, it is subject to limitations.

The risk to homeowners is also clear. The loan will cat away--and could wipe out--the value of the home. If the senior or client wanted to pass the home to the next generation or loved one, that person may be saddled with a sizeable debt.

Of course, this brief article is no substitute for a careful consideration of all the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney, or tax advisor as appropriate.

A wheelchair user since a May 1999 automobile accident, Dan Jones provides experienced financial services counsel. He is a registered investment advisor and is available at your convenience for a no-obligation consultation.

Information for this column is provided by Dan Jones, vice president, investments, at Raymond James & Associates, Inc., in Bala Cynwyd, Penn. The company is a wholly-owned subsidiary of Raymond James Financial, Inc., an investment firm founded in 1962 (NYSE-RIF). Contact: (800) 657-8969 (toll-free) / Dan, /
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Title Annotation:reverse mortgages; Money Talks
Author:Jones, Dan
Publication:PN - Paraplegia News
Geographic Code:1USA
Date:Oct 1, 2003
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