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    Briefly Noted

    Reverse Mortgages: The Pros and Cons of Cashing In

    A reverse mortgage can be a powerful tool for converting home equity, but they also present some financial risk.

    Reverse mortgages work like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. These payments are cash advances against the equity in your home.

    The maximum amount that can be borrowed is usually based on the age of the homeowner, the appraised value of the home, and the current interest rate. Generally, the more equity you have in your home, the older you are, and the lower the interest rate, the more you can tap into it for cash.

    Through the reverse mortgage, you continue to own your home and are responsible for property taxes, operating expenses, and maintenance. Because you make no payments on the loan, the balance owed increases each month as interest is applied and compounds. To qualify, you must be age 62 or older, you must occupy the home as your principal residence, and it must be owned free and clear, or have a small outstanding mortgage balance that can be paid off with the reverse mortgage.

    Repayment is due when you die, sell your home, or no longer occupy it as your principal residence. When payment is due, there is no requirement that the property be sold, only that the loan be repaid.

    Pros:

    • The cash payments you receive are tax-free since they are loan proceeds and not income, and they do not affect Social Security or Medicare benefits.

    • There are no minimum income requirements to qualify and no credit checks.

    • You can use the money for any purpose.

    • You may be able to create a cash flow stream for the remainder of your life.

    Cons:

    • Reverse mortgages are complex. In fact, you must attend a counseling session before applying for a reverse mortgage.

    • Reverse mortgages can have very high up-front closing costs. If you think you might move in a few years, a reverse mortgage may not be the best decision. They make the most sense for those who plan to stay in their homes permanently.

    • Reverse mortgages are relatively expensive. The interest is added to the loan balance each month, and the total interest you owe increases greatly over time as the interest compounds.

    • A reverse mortgage uses up the equity in your home, so it reduces what you have left to leave your heirs.

    Socked Away: $14.3 Trillion Retirement Nest Egg

    Americans held a record $14.3 trillion in retirement assets, of which $3.4 trillion were invested in mutual funds, at the end of 2005, according to the Investment Company Institute.

    The 6% growth in retirement assets during 2005 was powered by strong growth in individual retirement accounts (IRAs) and employer-sponsored defined-contribution plans.

    Memo to Investors: Don’t Horse Around

    Purchasing a racehorse is a risky investment in which the odds of hitting it big for most owners are about as long as getting an entry into a Triple Crown race.

    Even for the high rollers who pump millions of dollars into the sport, the sheer enjoyment of competing often outweighs grandiose visions of handsome paydays, said Dan Metzger, president of the Thoroughbred Owners & Breeders Association in Lexington, Kentucky.

    “They want lightning in a bottle, but they also have realistic expectations,” he explained. “It’s a speculative business. Most just want to break even.”

    Beware Summertime “Phishing” for Taxpayers

    The IRS is reminding taxpayers to be on the lookout for bogus E-mails claiming to be from the tax agency, on the heels of a recent increase in scam E-mails.

    In recent weeks the IRS has experienced an increase in complaints about E-mails designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipient’s identity and financial assets.

    “The IRS does not send out unsolicited E-mails asking for personal information,” IRS Commissioner Mark W. Everson said in a prepared statement. “Don’t be taken in by these criminals.”

    The current scams claim to come from the IRS, tell recipients that they are due a federal tax refund, and direct them to a Web site that appears to be a genuine IRS site. The bogus sites contain forms or interactive Web pages similar to the IRS forms or Web pages but that have been modified to request detailed personal and financial information from the E-mail recipients. In addition, E-mail addresses ending with “.edu”—involving users in the education community—currently seem to be heavily targeted. Tricking consumers into disclosing their personal and financial information, such as secret access data or credit card or bank account numbers, is fraudulent activity that can result in identity theft.

    Source: Accountingweb.com.