Money Management Q&As

January 20, 2006



Financing a home with a reverse mortgage

Q. My parents, both in their early 70s, intend to give up renting an apartment and buy a $200,000 condo in a retirement community. Can they use a reverse mortgage to finance the purchase so they won't have to pay principal and interest while they live?

A. Yes, but the amount they can borrow depends not only on the property value and location but also on their age. With a down payment of, say, $40,000, they could obtain an ordinary mortgage for the $160,000 balance. In contrast, the loan limit on a reverse mortgage would likely be much less, requiring a larger down payment. If they can't afford to put in the additional cash, a standard purchase mortgage may be a better choice, particularly since the interest on it would be tax-deductible each year. That doesn't apply to a reverse mortgage, because the interest on it isn't deductible until it's actually paid at the end of the loan period. The National Reverse Mortgage Lenders Association ( http://www.reversemortgage.org) provides detailed information on types and availability of such mortgages.

Q. I recently inherited a considerable sum of money and would like to open an account with a broker, to build a securities portfolio. How should I go about it?

A. Start by talking face to face with sales representatives at several firms. Find out about their investment experience, professional background, and education. Ask for a copy of the firm's commission schedule, as well as what you'll be charged to open, maintain, and close your account. Be mindful that a sales rep may get extra commission for selling the firm's own investment products.

Look for a firm that's a member of the Securities Investor Protection Corporation (SIPC), which may partially protect you if the brokerage becomes insolvent. But be aware that the SIPC doesn't insure against losses due to a decline in the market.

Although the broker may ask you to sign a legally binding agreement to arbitrate disputes, federal securities laws don't require it. If you do sign such an agreement, you give up the right to sue your sales representative and firm in court. You can always choose arbitration later, even if you don't sign the agreement.

Helping employees invest 401(k) money

Q. Some of our employees hesitate to participate in our 401(k) plan because they're unsure about which investments to choose. Do the regulations permit us to provide optional consulting services for which the employees would have to pay?

A. Yes. A growing number of employers these days are contracting with outside consultants, such as Financial Engines ( http://www.financialengines.com) from whom plan participants can obtain investment advice and portfolio management for a fee. Taking into account the employee's financial situation and tolerance for risk, the consultant may either provide an evaluation of the available alternatives or, if the participant prefers, research and select the actual investments for him.

When wedding bills are wringing

Q. The cost of my daughter's forthcoming wedding equals the annual budget of a developing nation. Is there a way to safeguard my investment if things don't go according to plan?