DEAR BRUCE: We are a childless couple in our early 70s. We have a good deal of equity in our home. We could live better and travel more if we had more “money.” We are bombarded with mailers and ads on television about reverse mortgages. When is this a good idea and for whom? How does it work? — R.J., via e-mail
DEAR R.J.: Reverse mortgages can be very useful tools or very damaging, depending on the individual. You seem to be an ideal candidate. You have reached your 70s, which is the minimum age a reverse mortgage should be considered. The older the person taking out the mortgage, the more money the lending company is willing to provide given your longevity being actuarially shorter. You also have mentioned you have no children. Oftentimes, people are reluctant to go into a reverse mortgage because it would reduce the estate they could leave. Given that this is not a variable in your case also mitigates in favor of the reverse mortgage. You should know that the interest rates are going to be a bit higher and there are other charges that you will have to pay. In addition, the current mortgage on your home will have to be retired. There are legal limits as to the amount of money that can be loaned predicated on housing values in your county. All of these things considered, you might wish to talk to your bank or lender who processes reverse mortgages. You should know that no matter how long you live, as long as the taxes are paid on the home, you have a right to stay there without regard to how much money you have withdrawn from the lender. This is an excellent method of allowing people to stay in their homes and spend a portion of the equity that they have earned during their lifetime. Take into account some of the variables I have mentioned. In your case, I’d say go for it.
DEAR BRUCE: What are your thoughts on the companies that claim they can help reduce and settle debt to the IRS? I have been paying a tax bill of $18,000 for about five years at $232 a month. When the end of year comes around, I can’t keep up with the penalties and interest. I am wondering if I should try one of these companies. They want to charge an upfront fee of around $2,000. — J.C., via e-mail
DEAR J.C.: The ads are, in all likelihood, placed by firms that will help you make what is called an “offer and compromise” proposal. There are some people, you may be one of them, who will never be able to pay off the tax bill based upon their income and other obligations. The IRS, like many businesses, recognizes that since they very likely will never be paid in full, they are willing to make a compromise and accept a lesser amount in cash as full settlement. This presupposes that you have some cash that you can offer, otherwise the law that allows this, in your case, is moot. What troubles me is the substantial up-front fee. While I recognize the company’s position is that they could easily be stuck, so could the client. A reasonable compromise would be the money could be put in escrow with an attorney who would release it only under certain circumstances. A very important factor here is your ability to be able to pay a fairly substantial amount of money up front in cash. If you’re able to borrow that elsewhere, compromise makes wonderful sense for all parties involved.
DEAR BRUCE: My husband and I have been married for three years now. We’re both on our second marriage. We are both 34 years old and have four children combined. We always pay in cash for items that we need. We have no credit cards or bad credit. However, we have “no credit.” I have power of attorney for my husband because he is a welder and pipe fitter who works all over the country. We would like to buy some land and put a house on it, but no one will consider us for a mortgage, even though he makes really good money. We don’t struggle financially by any means and can make a house payment with no problem. What can we do to build credit when banks won’t look at us to give loans or a credit card? — Christina, South Carolina
DEAR CHRISTINA: Several things go against you. While many years ago it seemed like a good idea to recommend to people that they only pay cash, no debt, etc., it has proven today to be a huge detriment. No credit history can often be worse than bad credit history. However, at 34 you’ve got lots of time ahead if you take the appropriate steps. I assume that you have a checking account. If you don’t, you should open one immediately. Also if it’s possible, you might wish to invest at least some money in CDs at a local bank that also issues credit cards. The fact that you are now a customer, both a CD and a checking customer, will work in your favor for at least a low-limit credit card, which will ordinarily be increased as you pay your bills on time. While you don’t wish to max out the credit line, having a medium balance that you pay on every month can work in your favor. Even if after doing this, you cannot find a traditional credit card company that will issue you a lower limit card, you might wish to open a collateralized credit card account, which I’m confident would be no problem. However, there will be an expense incurred. With a collateralized credit card, you will be required to make a deposit in the bank that issues the card in the amount of credit line you wish, and, if you don’t pay your bill, then the deposit will be withdrawn.
DEAR BRUCE: How can I get the rest of my money out of an annuity? I haven’t paid surrender fees for years. My insurance broker has a deaf ear every time I bring it up! — R.K., via e-mail
DEAR R.K.: Unhappily, I know of no way you can accelerate taking your money out of the annuity without paying a very serious surrender fee. This is one of the reasons that many of us have counseled against many types of variable annuities. While the insurance guy selling (who made a very comfortable commission) will tell you how wonderful the tax advantages are and the returns, they don’t share with you that many times you have to wait as many as seven years before you can get to your principle without penalty. This is a contract and has to be lived up to by both sides. There has been in the past litigation by government officials to force companies to accelerate the surrender. I doubt seriously that you’re going to find precedent that will allow you to make these withdrawals without some considerable expense. We live and learn.
Interested in buying or selling a house? Let Bruce Williams’ “House Smart” be your guide. Price: $14.95, plus shipping and handling. Call: (800) 337-2346.
Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: bruce@brucewilliams.com. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.