Silver Planet™ Help Your Parents Age in Place.

Before we leave the story of Jim and Sue, there is one more angle to consider in any mortgage payoff analysis. The bane of most investors, especially retirees, is the increase in the cost of living, also known as the reduction in purchasing power, or inflation, for short. Over the last 80 or so years, inflation has averaged 3%. What might inflation be over the next 35 years, which is Jim and Sue’s combined life expectancy?

There are two more reasons for couples in their 50s and 60s to seriously consider carrying a mortgage. If Jim and Sue were to invest the $200,000 they inherited, what kind of returns could they realistically expect? I never try to guess future interest rates, stock market values, or inflation rates, and I don’t believe in market timing as a consistently successful enterprise.

Let’s return to Jim and Sue, our profoundly fortunate and financially savvy couple with the $200,000 windfall. Should they get rid of their monthly mortgage payment once and for all? They’ve never liked being in debt and feel that the moral high ground leads to a debt-free existence. “Neither a borrower nor a lender be” is their credo, and now is their big chance to truly live it. Besides, think of the interest they’ll save!

My next several blogs will cover the financially responsible use of credit. The year 2009 has clearly been one of financial uncertainty, both in the stock market and in the credit market. The days of abundant and cheap credit are gone. The easy underwriting standards of 2007 seem like distant history. More than $1 trillion of credit lines extended by banks have been eliminated in the last few months.

This final posting on reverse mortgages is more of an editorial. One last drawback to them is the aggressive and often misleading advertising targeting seniors. The promotional copy is often designed to tap into our most primitive emotions—fear and greed—to get you to sign on.

I received one such pitch in the mail a few weeks ago. The mortgage lender was hoping that I would pass on the “newsletter” to my elder law clients. I won’t. What follows are some of its claims and my parenthetical thoughts.

By far the biggest downside of reverse mortgages is the high cost imposed on the senior. Front-load fees, closing costs, and mortgage insurance may eat up 7% to 10% of the home’s value. Recent federal law has eased this burden somewhat, capping origination fees at 2% for the first $200,000 and 1% on any amount over that, with a total cap of $6,000.

Seniors have been tempted, this year more than ever, to access cash through this government-insured program. The obvious appeal is cash flow into a checking or savings account, rather than out. Proceeds from a reverse mortgage are used to pay off an existing mortgage more than 85% of the time. Any amount that exceeds the previous conventional mortgage balance is just money in your pocket. For those seniors who have seen their IRA balances plummet 30% to 40% in the last year, this cash seems like a godsend.