Financial Planning for Seniors
As you prepare to finalize your 2011 Income Tax statements, this is the time to do some serious financial planning for the future. Taking a close look at the previous year’s finances is a prime opportunity for you to review the income and expenses of the year and consider your budgeting potential for the coming years.
If you’re a senior and managing on your retirement income, you’re doing well. However, perhaps you’d like to go beyond “managing.” Many seniors would like to travel, remodel, open a small cottage industry or help their children financially. Other retirees are simply looking for extra cash which can supplement an existing pension. This additional income can supply additional revenue and make the difference between barely meeting expenses and living comfortably.
Set aside some time to review your tax statement and create a monthly budget. What are your “obligatory” expenses? What are the “extras?” Do you have a savings plan? Do you have money set aside for an emergency?
One option which can provide seniors with additional income is the Home Equity Conversion Mortgage (HECM). This loan, also called a “Reverse Mortgage” is a loan that allows the home owners to borrow against their home’s equity.
The Reverse Mortgage is insured by the Federal Housing Administration (FDA), ensuring its stability. The loan is available to seniors aged 62 and older (a couple can sign on the Reverse Mortgage together if both partners are at least 62 years old) who occupy the property and maintain it as their principal residence. The Department of Housing and Urban Development limits the loan so if your house is worth more than the $625,000 limit set by HUD you can apply according to the HUD loan limit.
You are entitled to a percentage of the home’s equity based on the house’s appraised value (adjusted for needed repairs or existing liens on the house) and your age. Older seniors receive a higher proportion of the home’s equity than younger seniors. In addition, you have the option of withdrawing the loan as a line of credit, lump sum or as monthly payments. With a line of credit you’ll be able to maximize the loan’s value while a lump sum will enable you to use the money immediately — perhaps for a trip for a longed-for purchase. If you choose to draw out your loan through monthly payments you can select “tenure” payments which assure you of monthly payments for the rest of your life or “term” payments which will continue for a predetermined period of time.
Some economists have voiced criticism of the HECM mortgage, noting that interest rates and closing costs are quite high. With careful planning you can keep those costs to a minimum. Shop around — fees among HECM lenders vary so you can compare costs to get the best deal possible. In addition, show proof of a good credit rating. Many lenders will give you a better interest rate or lower closing fees if you can demonstrate that you have good credit.