Reverse Mortgage Guide

During the past week we have had the opportunity to host a couple in their mid-80s, people who well remember the Depression era — and don’t want to repeat it.

Rather than a reverse mortgage, they took a different approach to senior home financing: They sold the home they had owned for some 40 years, took half the money and bought a replacement property. They then invested the remaining cash in short-term, FDIC-insured certificates of deposit (CDs).

During the past few years such a strategy would have seemed down-right dowdy to go-go investors given soaring stock market values and booming home prices, but now such an investment approach sure seems attractive. While the interest rate on CDs may not match some of the gains seen in recent years with other forms of investment, at least our very senior couple have preserved their capital, have no mortgage and actually generate a cash income — not too bad. All their profit from the home sale was tax deductible as it was less than $500,000.

“Investors searching for relatively low-risk investments that can easily be converted into cash.” says the FDIC, “often turn to certificates of deposit (CDs). A CD is a special type of deposit account with a bank or thrift institution that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $250,000.

“Here’s how CDs work: When you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in or redeem your CD, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an “early withdrawal” penalty or forfeit a portion of the interest you earned.”

Our visitors, of course, we not rejecting reverse mortgages, but in their situation such financing was just not right for them. They had a home which was free-and-clear, a significant investment income, a modest lifestyle and a home which was too big for their needs.

Many seniors, however, might not want a smaller house or a different neighborhood. For them, a reverse mortgage might make sense as a way to obtain additional cash or income while staying in place.

For more information regarding FDIC-insured CDs, please press here.

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This entry was posted on Tuesday, October 21st, 2008 at 5:12 am and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.