The Center For Debt Management
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Money Tips After You Retire:
Managing Your Expenses on a Fixed or Reduced Income

... Continued From Previous Page

Understand the pros, cons and costs before borrowing money with a "reverse mortgage." This is a type of home equity loan — a way to get cash by borrowing money using your home as collateral. But there are some important differences between a reverse mortgage and the traditional home equity loan.

First, a reverse mortgage is available to homeowners age 62 or older. Second, you don't need an income to obtain a reverse mortgage. And third, you don't need to pay back what you owe until you move out of the house, sell the property or die.

While there are potential benefits to reverse mortgages, they don't make sense for everyone. They generally are not advisable if you plan to stay in your home for less than five years or need extra monthly income for relatively small expenses. Among the reasons: The fees associated with reverse mortgage loans can be high. You still will be responsible for maintaining the house and paying property taxes. And, your beneficiaries won't inherit the full value of the house. They will have to pay off the loan either by refinancing or selling the house.

Also be aware that some unscrupulous individuals or companies have promoted reverse mortgages that were not in the consumers' best interest or that involved extra payments for unnecessary services.

For example, there have been reports of companies attempting to sell questionable home repairs or investments in connection with a reverse mortgage, or they charged a fee for information about reverse mortgages that is available for free from the U.S. Department of Housing and Urban Development (HUD) or other sources. One problem with using any loan product to fund an investment is that you could lose money on the investment and still owe on the loan.

How can you protect yourself? As with any loan you're considering, do some research using information from neutral, unbiased sources, such as HUD. If you later decide that a reverse mortgage is right for you, contact several reputable lenders and read and understand all documents and contracts, perhaps with the help of an attorney you trust, before you agree to anything.

For help or guidance regarding reverse mortgages contact a HUD-approved housing counselor by calling toll-free 1-800-569-4287. Also, to receive a reverse mortgage insured by the Federal Housing Administration (FHA), you must first speak with a HUD-approved counselor, who can help you determine if the program meets your needs.

Do your research before purchasing "variable life insurance" or a "variable annuity." Both products are part insurance and part securities.

The first is a type of "whole life" insurance product (also called "permanent life" insurance) for which the policyholder's cash value is invested in one or more portfolios of securities.

The second product is an annuity, for which the consumer invests, through the insurer, in a variety of investment options, typically mutual funds.

Insurance companies issue both products, and anyone who sells them must be registered under state insurance laws and state and federal securities laws.

Although these products provide tax-deferred earnings, you can lose money investing in them. Income and value can move up and down. That's what the "variable" in the name means.

These products also may carry relatively high sales commissions, fees and "surrender charges" if you withdraw money early, typically within the first five to eight years after purchasing the product but sometimes after a longer period.

So, think of variable annuities as long-term investments that can tie up your money for many years. The older you are, the less likely a variable annuity is suitable for you.

Of special concern is that securities and insurance regulators have reported an increase in unsuitable sales of variable products to older investors, who experts say should generally stick to low-risk, low- or no-fee financial products instead of those with potentially high risks and fees.

"Before you invest in a variable life insurance or variable annuity product, be sure that you fully understand how the product works, the risk of loss, and the applicable fees and surrender charges," said Victoria Pawelski, an FDIC Policy Analyst. "Carefully evaluate whether the product is suitable for you given your investment objectives and time frame. And beware of high-pressure sales tactics from sales representatives who may have an incentive to generate high commissions and fees."


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