How to choose the right reverse mortgage, When post-65 earnings boost Social Security benefits, Dealing with the insurer if your car is "totaled", How early redemption affects bond yields, Financing the purchase of undeveloped land, Disclaiming your share of jointly owned property
Q My folks would probably benefit from a reverse mortgage, because they have a lot of equity in their home. Can you briefly describe the available types?
A All reverse mortgages offer a choice of monthly loan advances, a line of credit, or a combination of both. The amount you're eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging. Depending on the plan you select, the loan becomes due with interest when you either sell your home, die, or reach the end of a preset term. Because you retain title to your home, you're responsible for taxes, repairs, and maintenance. Your parents can choose from three basic types of reverse mortgage:
FHA-insured plans guarantee that they'll continue to receive loan advances even if a lender defaults. However, FHA-insured mortgages may provide smaller loan advances than lender-insured plans, and the loan costs may be greater than those of uninsured plans.
Lender-insured plans, though more costly, may provide larger monthly advances and may allow your parents to mortgage less than the full value of their home, thereby preserving part of their equity for later use. Some plans include an annuity that would continue making monthly payments to them even if they sell the home. These "reverse annuity mortgages" may also involve additional charges based on increases in the value of the home during the loan's term.
Uninsured plans provide monthly advances for a fixed number of years that your parents would select when they take out the loan. If they have substantial short-term cash needs, this plan may fill the bill, because it offers the largest monthly advances. But if your parents are unable to repay the loan from other resources at the end of the term, they might have to sell their home.
For further information and guidance, contact the nonprofit National Center for Home Equity Conversion Mortgage (www.reverse.org), the National Reverse Mortgage Lenders Association (www.reversemortgage.org), or Fannie Mae (www.homepath.com; click on "Getting More Out of Your Home").
Q I intend to keep practicing after I turn 65 this year. I understand that my earnings won't lower the Social Security benefits I'll begin collecting then. But I wonder if those earnings will increase my benefits? After all, I'll be paying Social Security tax on the earnings.
A They might increase your benefits. Social Security benefits are based on the indexed average of your monthly earnings over the course of your working careerdefined as 35 years. If you had fewer than 35 years' of earnings, additional earnings will increase your monthly benefit, because a post-65 earnings year will replace a year when you earned zero. Even if you worked 35 years and earned the maximum amount subject to Social Security tax in each of them, additional years of earnings may raise your monthly benefit if the additional earnings are higher than the earnings in one of those earlier years. When the government calculates the average of your earnings, it may come up with a higher figure.
The Social Security Administration will automatically recompute your benefit annually to take your new earnings into account. If an increase is justified, you normally won't be notified of it until the following November, but it will be retroactive for the entire year and you'll get a lump sum payment in December. Also, any cost-of-living raise for the year ahead will be based on the recomputed benefit.
Q My car was badly damaged in an accident, but the insurance company refuses to pay more than its cash value, even though that's less than the cost to repair it. What recourse do I have?
A Probably none. The insurer isn't obliged to reimburse you for more than your car was worth at the time of the accident. Don't be surprised, moreover, if the amount offered is smaller than the figure in the Kelley Blue Book or NADA Official Used Car Guide. Those sources of used-car values are most familiar to consumers, but chances are the insurer subscribes to a proprietary database that generally comes up with lower estimates. Hiring your own appraiser or going to court probably isn't worthwhile, but if the company's offer is way out of line, you may be able to obtain a better one through negotiation or arbitration.
Alternatively, you can take the settlement and ask to keep the car, so that you can have it repaired at your expense. In that case, though, the company may deduct the car's salvage value from the settlement. On the other hand, if you decide to buy a replacement vehicle, most states require the insurer to reimburse you for a portion of the sales tax, title, and registration costs (prorated on the old car's value). Make sure you request this, because some companies may not do it automatically.
Q I paid $980 apiece for some $1,000 bonds with a 6 percent coupon. They mature in 10 years, but the issuer can call them earlier at face value. The broker's statement shows a 6.3 percent yield to maturity and indicates the yield will be higher if the bonds are called. How can that be?
A Since the bonds have a $1,000 face value, you'll receive $20 more than your $980 cost whenever they're redeemed. The yield-to-maturity calculation takes this "call premium" into account. If the bonds are called after only five years, say, you'd get the $20 profit sooner, so your yield to call would be almost 6.5 percent. Conversely, if you'd paid more than face value for the bonds, early redemption would result in a yield to call that's lower than the yield to maturity.
Bond issuers often pay a call premium to compensate investors for possible losses and inconvenience due to early redemption.
Q I'd like to invest in undeveloped land, preferably with seller financing. What sort of mortgage deal should I try for?
A An interest-only loan would help minimize your cash outlay, leaving you more capital to invest elsewhere. Say the seller is willing to take a $10,000 down payment on a $100,000 parcel, with the balance payable over 10 years at 8 percent. For the first five years, an interest-only arrangement would cost you $7,200 annually (8 percent on $90,000). In each of the remaining five years, you'd be obligated to pay a fifth of the principal ($18,000) plus a diminishing amount of interest. If the land's value rises, you might be able to sell out profitably before you had to make any principal payments.
What if you can't unload the property before then? To cover this eventuality, ask for a mortgage clause that gives you title to portions of the acreage each year you pay principal. That way, you may be able to speed up your investment return by selling, leasing, or developing portions of the land as you gain ownership. (For more on investing in land, see "Turn plain dirt into pay dirt," March 5, 2001.)
Q For several years, my son and I have owned some real estate jointly, and he'll get my half if he survives me. After I die, can he disclaim the property in favor of my wife, if that becomes desirable under the new tax law? Does it matter that I paid the entire purchase price for the property?
A Even though you were the sole purchaser, your son can disclaim your share if he does so within nine months of your death. But only your will can specify what happens to it then, so you may have to amend the will to make clear that your wife is to inherit your half if your son disclaims it. In any case, your son won't be able to disclaim the half he owns now.
Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to firstname.lastname@example.org (please include your regular postal address). Sorry, but we're not able to answer readers individually.
Lawrence Farber. Money Management.