Reverse Mortgages

I’m not that familiar with the intricacies of reverse mortgages but one of my clients recently asked if it was a good idea for him to do one so I did some research. Here’s what I’ve learned about them so far:

When you have a traditional mortgage, you take out a loan and pay the lender payments so that after a period of time (30 years, usually) you own 100% of the home. With a reverse mortgage, you start off with a house that you own 100% and then borrow against it and the lender pays you. Now why would that be a bad thing? Because you’ve traded having no debt on your home for increasing debt on your home and when you pass away or decide to sell your home, you have to repay the loan and could end up with nothing (i.e. no home) depending on how much you owe and how much your home is worth at that time. Not to mention there are a bunch of fees involved and you’re still responsible for all the carrying costs – property taxes, HOA dues, insurance, etc.

You have to be over 62 to even qualify for a reverse mortgage so this obviously doesn’t apply to us millennials right now. However, this could apply to our parents. Most of our parents are over the age of 62 (or will be within the next decade) and they’ll likely have a paid off house. If they’re in retirement and running out of money, someone might tell them to do a reverse mortgage. And now that you know that it’s not a good idea, you can advise against it and try to convince them to consider other options instead like downsizing or selling their home and renting.

Dave Ramsey’s 7 Baby Steps

I was first introduced to Dave Ramsey in 2009, when I was still in college. My roommate at the time let me borrow her copy of The Total Money Makeover. Even though I had always been an avid saver and didn’t have any credit card debt, I wanted to learn more about money.

I didn’t retain a lot of the information I read at the time, but I remember agreeing with most of Dave’s principles. The book also helped me realize the importance of giving, which I had never thought much about before.

After reading that book, I didn’t think about Dave Ramsey or his 7 Baby Steps again until very recently.

At the end of the last year, my husband and I bought our third rental property. And when I finally filled out a net worth statement and realized just how much debt we had once we combined all three mortgages (plus a HELOC), it was a rude awakening to say the least.

Even though our net worth is still very much positive thanks to increasing home values, we don’t like having so much debt, or any debt, to be honest.

So shortly after we opened escrow, we started listening to The Dave Ramsey Show every day. Listening to all the Debt Free Screams has inspired us to finally take his 7 Baby Steps seriously and make a plan.

We are technically in Baby Step 2 because we have small car loan. But we should be able to jump to Baby Step 4 & 6 within the next 2 months (we’re skipping Baby Step 5 because don’t have kids yet) and here’s why:

Even though we have the cash to pay off the car, we are in the middle of a major home remodel for the new rental property we just bought. And since home remodels often come with expensive surprises (like suddenly all the pipes need to be replaced!), we want to have enough cash on hand to cover any of those surprises, rather than resort to borrowing more money.

Once the home remodel is compete, we should have enough cash remaining to pay off the car (Baby Step 2) and have a 3-6 month emergency fund in place (Baby Step 3).

My husband and I are currently saving about 10% of our gross income into our 401(k)s but as soon as the home remodel is done, we will bump it up to 15% (Baby Step 4). We will also be redoing our budget to make sure we can pay extra principle on our mortgages & HELOC to get out of debt faster (Baby Step 6).

Based off our current income and expenses, we are projected to be in Baby Step 6 for over 25 years (yikes!). But by reducing our expenses immediately and increasing our incomes over time, our goal is to get out of Baby Step 6 in 15 years or less. The average family takes 5-7 years to finished Baby Step 6 but since we have 3 rental properties, 15 years might be more realistic.

If all goes well, we should be financially independent the same time we pay off our last mortgage.

I know things won’t work out this way exactly because, you know, life happens. But that’s our plan and if we’re delayed by a few years, we would still be out of debt a heck of a lot sooner than if we had no plan at all.

Coverdell ESA (Education Savings Account)

If you’re a parent who wants to save money for your child(ren)’s education, you might want to consider opening a Coverdell ESA for each child.

For each child under the age of 18, you can contribute up to $2,000 a year to a Coverdell ESA. Contributions are not tax-deductible but the money in the account does grow tax-free and qualified distributions are also tax-free, kind of like a Roth IRA.

Qualified distributions include using the money for postsecondary tuition, fees, books, supplies, and basic room and board or $2,500 per year for off-campus away-from-home students. The Coverdell ESA can also be used to pay for K-12 expenses like tutoring, computer equipment, room and board, uniforms, and 529 contributions. We will talk about 529s in depth another time.

If the money is used for non-qualified education expenses (getting your nails done, watching a movie, Disneyland tickets…), you will have to pay taxes and penalties.

The balance of the account has to be completely distributed when the beneficiary (your child) reaches the age of 30. But if you don’t want to give your 30 year old child the remaining balance, you can roll it into another Coverdell ESA for a family member that’s related to them (i.e. their sibling who is still in school, their child/your grandkid, etc.).

A couple other things to note:

  • If you’re married and your modified AGI is over $220,000, you are considered phased out (i.e. you can’t make any contributions).  If your modified AGI is more than $190k but less than $220,000, you can make a contribution but not the full $2,000.  If you’re single, the limits are $95,000 and $110,000.
  • The annual deadline to make this contribution is when your tax return is due for that year (not including extensions).  For example, if you want to make a 2016 contribution, you have until April 15, 2017 to do so.

Good Personal Finance Reads

Murdering Your Consumer Debt (Millennial Revolution) – Great advice on how to tackle your consumer debt!  I don’t have consumer debt, but if I did, I would definitely follow his advice.

Marrying Your Equal Is Better Than Marrying Rich (Financial Samurai) – I can definitely see the validity of this statement in my line of work.

Guide to IRA Contribution Limits, Deadlines and Deductions (Get Rich Slowly) – A helpful article on IRAs.  This would’ve came in handy for my 2013 return.

 JL Collins’ Stock Series – Basically everything you need to know about investing.  I haven’t decided if I agree with 100% of what he says but Mr. Collins does a solid job of breaking down investing into to simple, easy to understand terms.

Rich People Problems

Ever wonder what kind of money problems multimillionaires have?  I’ll let you in on a little secret…

They have the same problems as everyone else, except on a grander scale.

  • they spend more than they earn – sometimes hundreds of thousands more
  • they can’t retire when they want – some of them will never be able to retire
  • they worry about how to pay for their kid’s college education (on top how to pay for a private elementary, middle and high school that costs them at least $20,000 a year per kid)
  • they have to take out second mortgages to fund major purchases like home remodels and their children’s weddings
  • they have credit card debt

How do I know all this?  Because these are the people I work with daily.

Why am I telling you this?  To show you that the answer to most of your financial problems is not earning, inheriting or winning more money.

You know what will fix your financial problems?

  • Spending less than you earn
  • Saving for retirement (early and often)
  • Saving up for major expenses (cars, home remodels, weddings) instead of taking out additional loans

For my clients who can retire comfortably, those are always the top 3 traits they all have in common.

Social Security Changes Part 3 – Who Should File and Suspend?

I haven’t had time to draft my final post for Social Security but I still wanted to share the information before the file and suspend deadline, which is this Friday, April 29th.

Here is an article that does a pretty good job of summarizing who qualifies for this strategy:

Who Should File-And-Suspend For Social Security Benefits By The April 29 Deadline?