Mom should reverse her mortgage and drive a new car
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Dear Mr. Berko:
After nearly nine months of confusion, worry and indecision, I’ve finally decided to apply for a reverse annuity mortgage. So I want to thank you for answering my questions months ago and putting up with me. When I get back from visiting my son in Washington, I will complete the application and will get a new income of $893 a month on my home that has no mortgage, is worth $349,000 and cost us $68,000 in 1964.
Now I have one more question for you concerning my paid-up $85,000 whole life insurance policy with a $73,000 cash value. My son and daughter want me to keep it, and they don’t want me to do the reverse mortgage either. I have a 1987 Chevy with 86,000 miles that runs well but I’m afraid it might need a big repair job any day. I’m considering cashing out my policy and using about $21,000 of the $73,000 cash value to buy a new car. The insurance agent said that would be OK, but wants me to put the remaining money, about $52,000, in a single-premium annuity that would pay me $383 a month. What do you think about this? I hate to bother you again, but I really need your advice.
M.D., Seminole, Fla.
Dear M.D.:
Congratulations on finally deciding to take out a reverse annuity mortgage (RAM).
This is the best, the easiest and probably the most painless way to make the equity you have accumulated in your home work for you. And I’m especially pleased that you finally decided to put yourself first, rather than your kids. Yes, it would be nice to leave your two adult children a home worth $349,000 plus an $85,000 insurance bonanza when you traipse off to wherever we go when we go. However, I think they have a different agenda than you. Between now and then — and I hope that’s a long time – it’s more important that you enjoy financial comfort when you traipse to the beauty parlor, your church socials, dinner with friends and an occasional cruise from the port at Tampa, Fla.
But I strongly recommend that you wait until January to sign the reverse annuity mortgage papers rather than doing it now. Yes, at age 75 you will get $893 a month every month for the rest of your life even if you live to be as old as Noah. And, yes, it’s tax-free, you can remain in your home till the Second Coming, your home remains in your name and even if your home value falls to zero, you never have to pay back a penny of what you receive if your house is sold later for less than the mortgage, nor will your estate or your children.
Yet I want you to wait until January because new legislation recently signed by President George W. Bush will allow the Federal Housing Administration (FHA) to increase your monthly income from $893 to nearly $1,300 a month. That’s worth waiting a couple of months. I’m disappointed that your dimwit mortgage broker failed to tell you this. There may be a lot of unhappy folks who signed RAM papers in November or December who got short-sheeted because they were not advised to wait another month or two. Is it any wonder that there is such distrust of corporate America?
Here’s the skinny. Your home in Seminole, Fla., is worth $349,000, but the current federal regulations only permit the FHA to calculate a payout on $223,000 of your home’s market value. However, the new guidelines recently signed by the president will allow the FHA to base payment to you on a higher $287,000 value, which is worth an additional $300 a month. Your monthly income could be even higher; if mortgage rates continue to trend lower, the interest costs on your RAM will decrease.
You need an $85,000 life insurance policy as much as our atmosphere needs more carbon dioxide. That policy has a $73,000 cash value, which really means you have only $12,000 ($85,000 less $73,000) worth of life insurance. Dump the policy, trade in your 1988 Chevy and get one of those new models that smell so good, drive so well and have a 50,000-mile thumper-to-bumper warranty. With the remaining money, about $52,000, purchase a single-premium immediate annuity that will give you $423 a month, every month, for as long as you live. The single premium annuity offered to you by your insurance man pays only $383 a month, and I think he’s giving you the short end of the stick. I’ve given you the names of two insurance professionals in your area, both of whom will welcome your call.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2008 Creators Syndicate Inc.
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