The Prosperity Blog

Using a Reverse Mortgage to Stop Foreclosure

Reverse mortgages are touted as a way for elderly retirees to create additional income by
borrowing against the equity in their homes without having to take on another payment.

Instead, the amount borrowed by the homeowner is due only when the home is sold, or the borrower dies. Since the terms of a reverse mortgage are based in part on the age of the borrower (the older the borrower, the more favorable the deal), a reverse mortgage can be a profitable strategy for supplementing one’s retirement lifestyle.

But a December 26, 2007 Wall Street Journal article turned up another use for reverse mortgages: Staving off foreclosures for senior citizens, especially those whipsawed by declining or fixed incomes and rising payments from adjustable rate mortgages. The strategy, used by an increasing number of legal-aid advocates, isn’t suitable for everyone. But in the right circumstances, it can be a financial life-saver. A typical scenario: A senior couple with significant home equity needs cash. Attracted to the favorable terms of an adjustable-rate mortgage (low initial interest rate, minimum payment options), they take on a new mortgage, one they can theoretically afford. Over the next few years, interest rates increase and so do monthly payments. Perhaps because of health issues, increased living costs, or decreased income, the seniors find themselves unable to meet the mortgage obligation, and facing foreclosure. Even though they cannot meet their monthly mortgage obligation, the couple still has substantial equity in their home. With the assistance of a reverse-mortgage expert, the couple uses the remaining equity to negotiate a settlement on the existing mortgage. While they receive no cash out from this arrangement, the settlement eliminates the monthly mortgage payment, and keeps them in their home.

Read More

Knowing the Reasons Not To Do Something

Last Updated: September 3, 2020

“If you can’t explain it simply, you don’t understand it well enough.” Albert Einstein

Ever have this experience trying on new clothes? The fashion consultant raves over each new garment, saying things like: “Ooh, I can’t believe how great that looks on you!” or “Wow, I can’t decide which one I like better!” If you’re like most of us, you probably appreciate the compliments and personal attention. Yet there’s also a part of you that knows some of the enthusiasm stems from being a potential customer. So you take the comments with a grain of salt. Now suppose a salesperson said, “You know, that style just doesn’t suit you. I think this one is a better fit.” What would you think?

Table of Contents

The Reasons Why, and The Reasons Why Not

When it comes to assessing your relationship with the financial professionals that give input on your financial transactions, one of the things you might want to evaluate is how well these people can explain the reasons not to do something, especially the things that they most often recommend or support.

Example #1:

An advisor or financial professional who recommends participation in a qualified retirement account probably knows all of the benefits of participation–contributions are tax-deductible (and are taken from your paycheck automatically), there are loan provisions, etc. The advisor may try to convince you that since a retirement account is a basic form of saving, and saving is a positive thing, a qualified retirement account is something that offers a benefit to everyone.

Is there ever a reason not to participate in a qualified strategy? What if you are saving for a down payment on a house? What if you have outstanding credit card balances? What if you are still trying to get six months of income set aside in an opportunity fund? Would any of those circumstances change your advisor’s recommendation? From a consumer or client perspective, you want advisors that know both the reasons to participate in a particular strategy or product and the reasons not to participate. Because while most common financial strategies and products have broad application and appeal, they may not be the right fit for your unique situation.

Example #2:

Your insurance advisor for your homeowner’s policy may want to reevaluate your coverage levels at your renewal time each year. There are many reasons why you may need to increase your coverage (and thus pay more for your insurance policy)–your property values may have gone up, you may have added features to your home, or you may simply have realized that you never purchased enough coverage in the first place.

Are there reasons not to add more coverage? After all, you can never be overprotected, right? Actually – you can, and a trusted insurance advisor should help you right-size your coverage levels, not just add to them. Even if you have the opportunity to get a “great deal” on additional coverage, it might be more beneficial to forgo the additional coverage if your property values have gone down or you recently paid off your house. If you are paying for too much coverage, you need a trusted advisor who is willing to have that honest conversation.

Ideally, competent advisors mention the reasons “not to” as part of their dialog with you. Either it comes up in the course of discovery conversations about your objectives, current situation, and financial philosophies, or it is part of the education and explanation provided by the advisor when making the recommendation. If the advisor doesn’t bring up the reasons “not to,” be sure to ask. Getting an answer to the reasons “not to” is like getting a second opinion from the same doctor. Although the proposal will probably stay the same, it should give you an even clearer understanding as to why the proposal was made in the first place.

Two Cautionary Thoughts On the Reasons Not To

1. Beware the critic. Getting a second opinion regarding any financial strategy may have merit. Just be careful about someone with a narrow perspective or an ax to grind. Some people make a living out of fear tactics – they go around warning others what not to do, yet provide very little substance on the best actions to take.

If you’ve had any exposure to the concept of life insurance, you soon pick up on the philosophical conflict between those who advocate term insurance and those who espouse the values of whole life or similar cash value policies. In their little corner of the universe, the divide can be as passionate as that between Yankee and Red Sox fans, or dog people vs. cat people. The respective sides can be quite dogmatic about their positions.

Historically, both types of policies have a long track record in the marketplace. So regardless of what the critics might say, it appears both types of life insurance have a legitimate place in individual programs. Someone with a one-sided perspective is obviously missing what many consumers find beneficial. It’s the same with the evaluation of qualified retirement strategies. Even as they proliferate in the workplace, there’s still a lot of non-qualified accumulation going on as well. Again, the ongoing existence of several approaches to accumulation should be an indicator that all of them have some validity.

2. If you aren’t going to follow this idea, what are you going to do instead? Isaac Newton’s first law of mechanical motion is the Law of Inertia: A body in a state of rest tends to remain at rest unless acted upon by an external force. The Law of Inertia has an application to human psychology as well. Most of us tend to prefer stability and resist change.

When a financial professional challenges you with a new idea, it can be an external force that upsets your status quo. The easiest way to restore your psychological equilibrium is to find a way to dismiss the new idea or strategy. If you’re looking for a reason not to do something–because you’re too busy, too bored, or want to spend the money on something more “fun”–you can always find a reason. A reason to wait, a reason to revisit the issue later, or a reason to push the issue aside.

Before you lock in on your reason not to go forward, entertain one more thought: If a trusted advisor gives you the reasons not to and yet still believes your situation is one where taking action would be the most beneficial, are you sure you want to blow it off? Go back to the department store example. As you try on several outfits, the fashion consultant steers you away from several lesser choices. Then after much review, there’s a moment where the fashion consultant says, “Hey, that’s a perfect fit for you.” Are you going to ignore that input?

Asking financial professionals for the reasons not to do something is a way to make their input even more valuable to you. Getting even better advice and an even better understanding only helps if you act on it. The purpose of getting the reasons not to do something is to get to the best idea of what to do. Take action and reap the rewards.

Read More

This website is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized investment advice. Information contained herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security or investment. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future.