Financial Articles

While there are a wide variety of reverse mortgages, only three types are nationally available. (Other reverse mortgage products and programs, mostly state and locally sponsored, tend to be for a specific purpose, e.g. solely to make repairs on your home or pay property taxes, and usually are for those who meet certain income or asset limits.)

The three primary reverse mortgage products are:

1. Home Equity Conversion Mortgage (HECM) - This is an FHA-insured (government-insured) loan, with a maximum loan amount of $362,790 (2006). The actual amount depends on your exact location, as limits vary by county. HECM is the most common reverse mortgage, accounting for 90 percent of all reverse mortgages in the United States.

2. Fannie Mae Home Keeper® - This Fannie Mae-insured loan offers a maximum of $417,000 (2006). It is often used to buy a smaller or more accessible home. (My book, Reverse Mortgages — Cash for the Rest of Your Life!, shows how this is done.) Fannie Mae is actually a private company, formerly known as the Federal National Mortgage Association. Although Fannie Mae is quite large, they are not the government. However, because of their size and the amount of regulation over them, their guarantee (their insurance) is virtually the same as the government’s.

3. Financial Freedom Cash Accounts - These are usually best for homeowners with high-value homes and high equity balances. These loans have no limit. They are offered by, and guaranteed by, a large private company.

Of course, anyone entering into a reverse mortgage will want to pick the type that pays the most to them. Unfortunately, there is no easy rule of thumb as to which loan results in the maximum payout. A number of factors affect the maximum amount, or loan limit, you can borrow. Your loan limit will depend on:

Loan Limits.

* HECM loans are guaranteed by the FHA, so FHA loan limits apply to all HECM loans. Limits vary by county and range from $200,160 to $362,790. They are 50% higher ($544,185) in Hawaii, Alaska, and the Virgin Islands. To find the loan limit for your specific area, visit the FHA’s web site at: https://entp.hud.gov/idapp/html/hicostlook.cfm.

* Fannie Mae Home Keeper® loans have one national limit of $417,000 (but are also 50 percent higher in Hawaii, Alaska, and the Virgin Islands). While this amount is higher than HECM, other differences in the calculations often result in a smaller loan.

* Financial Freedom Cash Account loans have a $75,000 minimum; there is no maximum, although it tends to be best suited for homes worth at least $500,000.

Home Value. The higher the appraised value of your home, the more you can borrow, up to the limits for the type of loan. Lenders’ calculations use your home’s value or the lending limit, whichever is lower. In other words, a $300,000 home in a county with a $175,000 limit is treated as a $175,000 home.

Age of borrower(s). The older the borrower(s), the more you can borrow. Some loans consider an average of the ages of both borrowers (if there are more than one), while others may consider the age of the youngest borrower only. Your age, whether there is another person on the title, and the age of the other person will all affect the amount of money you can expect.

The age at which you take out a reverse mortgage has a large impact on the amount of money you will receive. Lenders know that, most likely, older people will not live as long, and therefore, they will have to pay less to older borrowers. Also, if you are within six months of your next birthday, you will get the benefit of the higher age and qualify for the larger loan.

Interest Rate. The lower the rate, the more you can borrow. You can also select the payout option with the lowest rate, e.g. monthly vs. annually.

Limits vs. Loan Payouts. It is important, however, not to confuse the loan limit for a particular type of reverse mortgage with the maximum payout you can expect. For example, on a typical HECM loan with a limit of about $300,000, the actual payout will be about two thirds of that. Keep this in mind as you plan your financial future.

Gratefully, you won’t have to do all of the ‘number crunching’ yourself. Because reverse mortgages require a counseling session, your counselor can prepare the necessary calculations for you. In other words, someone else will do the calculations. You just need to pick the best answer.

Since there are so many variables that can impact the amount of money you receive, Reverse Mortgages — Cash for the Rest of Your Life! goes into many examples in detail, illustrating various options and how they might affect your reverse mortgage payout.

Rewards are everywhere! Gas stations… grocery stores… pharmacies… hotel chains… They all claim to reward you on purchases that you make. Likewise, credit card companies have their own rewards credit cards programs. Simply put, the more you spend, the more rewards you get from a rewards credit card. Sounds like a sweet deal, doesn’t it?

The Fun Factor of Rewards Programs

Unless you’re a savvy rewards credit card shopper that’s done his or her homework, then you might end up feeling like a kid again or worse yet, a fool. Remember dropping quarter after quarter into the machine trying to get that cute little stuffed animal only to end up with a little plastic finger ring and empty pockets. If lucky, you might have gotten that irresistible toy after all, but it probably cost you way more than it was really worth. With games, I guess the idea is “fun,” and if you get rewarded that’s even better. But with rewards credit cards, is the “fun factor” worth your hard earned money? Read more to find out how to keep the fun in the rewards.

Avoid High APRs

Cards with rewards often have higher interest rates than the typical card. For those who like to pay off their balances each month, rewards credit cards might be right up your alley. If you don’t pay off your balances, then you might find that the higher rates are not worth the rewards. You will need to do a little math to figure out the best deal.

Avoid Annual Fees

Like high APRs, a reward credit card may require you to pay annual fees as much as $40. Once you’ve paid the annual fee, the rewards might not be enough to justify getting the card in the first place. Consider the value of the reward versus the amount spent in annual fees and interest rates.

Cash In On Cash Back

Some rewards credit cards offer cash back rewards for your purchases. For example, you might earn 1% on all purchases. If you spend $5000, then you’ll get $50 back. This type of rewards credit card bases the cash back earned on the amount of purchases you make, and there might be a maximum limit you can claim. When evaluating these offers, be sure to read the fine print.

Accumulate and Redeem Points

Most point systems are designed to give you about one point per penny spent. Say you earn 1000 points using your reward credit card. You might get a reward worth about $10, such as a store gift certificate or credit that can be accumulated and applied to a larger gift reward. If a rewards credit card offers less, has a cap on the number of points you can earn or the points can expire before you use them, then you might find a better deal elsewhere. Take time to shop around!

Fly the Skies

Frequent flier programs are similar to the point system and cash back rewards. You might get one flier mile (or point) for every $2 that you spend using your card. Most cards require you to generate around 25,000 point before you can redeem them for free airline fare. Any cards that require you to accumulate more points might not be worth it. If you are a frequent flier and can benefit from this type of program, compare reward credit cards. The best place to do this is online.

There are numerous reward programs that are available when using rewards credit cards. Individual cards may have specialized programs that are tailored to various groups, such as small business owners, students, travelers, “shopaholics”, etc. Just like the carnival games, a girl will run straight for the games with doll prizes, whereas a boy will want to play for balls or cars. The same holds true for credit cards shoppers. But beware of the gag gifts! Take your time to read the fine print and shop around for the best rewards credit cards.

Know the Rules

Employee stock options can provide you with a substantial source of deferred income and permit you to control the recognition of taxable income. You generally pay no tax when an option is granted because you are not receiving any shares of stock, only the option to purchase shares at a later date.

In general, holding an option to acquire stock may be better than holding the stock itself. The option provides protection against loss should the value of the stock decline below the exercise price. In addition, the option gives the holder equivalent ownership rights in the corporation, without requiring any immediate investment. Employee stock options offer the potential to have post-exercise stock growth taxed as capital gains rather than ordinary income. This provides an advantage for those who are in the top tax brackets

Know the Difference

Nonqualified Stock Options (NSOs) give an employee the option to buy corporate stock at a specified, fixed price (usually at fair market value at the time the option is granted). In general, you must exercise your option to buy within a specified time period–typically 10 years or less.

Upon exercising your rights, any gain realized from the spread (the difference between the exercise price and the fair market value) is taxed as ordinary income. However, any gain realized from the date the option exercised until the date the stock is sold is taxed as capital gain.

Incentive Stock Options (ISOs) also offer the option to purchase corporate stock at a set price, but ISOs cannot be issued with an exercise price below the current fair market value of the stock.

Generally, the spread on ISOs is not subject to ordinary income tax at the time you exercise the option. However, spreads may be subject to the alternative minimum tax (consult your GROCO financial adviser for more information). Gain realized upon the sale of the ISO stock may be taxed as capital gain. Provided you have held the ISO stock for at least one year from the date of exercise and at least two years from the date the option was granted, the entire gain recognized upon sale of the stock is taxed as a long-term capital gain.

When to Exercise Your Options

The decision of when to exercise your options depends on several factors as well as your particular situation:

Your Company’s Plan

Generally, options become exercisable over a period of years. For example, options granted in the company plan vest 20 percent a year over five years. It’s important to know the details of your firm’s plan before you make a decision.

Your Company’s Growth

Understanding how your company is poised for growth is another important factor in your decision making process. Issues to review and understand are:

• How your company makes money – understand the industry that their earnings are tied to. 

   

• Evaluate sales – compare your company’s sales to the industry average of competitors. 

   

• Industry trends – monitor the industry that your company operates in. Look for growth opportunities and understand your company’s strategy for capturing market share. 

   

   

• Understand the factors that can affect the liquidity of the market – are lower interest rates and tax cuts freeing up resources for the company’s growth plans? 

   

• How your company is financing growth – are they growing as expected? 

   

• Know your leaders and their track record – a company’s strong executive team will likely yield continued success. 

   

• Understand your company’s P/E (price to earnings) ratio – look for strong cash flow and well-managed costs.

Your Current Financial Needs

The decision to exercise should consider the need for cash, the proximity to the option’s expiration and/or the current stock value as compared to its expected future value. With regard to ISOs, because of taxes, the required holding periods should be considered when determining when to exercise the options and/or sell the underlying stock.

Balancing Your Portfolio

You may also choose to exercise an option if your company’s stock represents a large portion of your investment portfolio and you wish to diversify your holdings. Some professionals say to reduce investment risk, company stock should not represent more than 40 percent of your portfolio.

Market Conditions

Obviously, market conditions will play a large role in your decision to exercise your option. If the stock underlying the option appreciates, you may wish to hold on to options as long as possible in order to take advantage of future gains.

Tax Ramifications

In the case of NSOs, you may want to consider exercising your option over a few years to avoid being forced into a higher tax bracket. Remember, the spread on NSOs is subject to regular income tax at the time of exercise. Because appreciation occurring before exercise is taxed as ordinary income, it may be advantageous to exercise over time.

Your company’s nonqualified stock options may be transferable to family members. If so, you may be able to trim your estate tax by giving options to your heirs. The transfer may be gift tax free if the value transferred is $11,000 or less ($22,000 if married). notwithstanding the transfer, upon exercise the executive will be responsible for any income taxes generated.

Alan L. Olsen is the Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a top Bay Area CPA firm. A specialist in income tax planning, he frequently lectures and writes articles on tax issues for professional organizations and community groups. Alan has over 21 years experience in advanced tax planning including international tax, company reorganizations, multi-state taxation, financial statement preparation, stock options, estates and trusts, and representation before tax authorities. Alan received a BS in Accounting from Brigham Young University and an MBA in Taxation from California State University at Hayward. His website is ranked among the top accounting sites in the nation, featuring tax tools and wealth management articles: http://www.groco.com/