Benson advises investors to avoid locking in large amounts cash for periods longer than a year. An investor hasn't gained anything if living expenses increase 4 percent or 5 percent, and the deposit is locked in at 3.5 percent, he says. Depositing in new CDs every six months to a year will allow for rate changes.
"The idea is to have money coming due each year," Benson says.
What to do: investing inertia
- Meet with a financial planner at least twice a year to review asset allocations in your portfolio to continue working toward investment targets.
- Investigate investment options in bonds or treasury bills.
- Deposit in short-term CDs or consider building a CD ladder.
5. Obtaining cash from your home
They don't make home equity loans like they used to.
Tom Kelly, spokesman for JP Morgan Chase & Co., says that previously the bank had been originating loans at 95 percent to 100 percent of a home's value. But following the subprime mortgage meltdown, that threshold has dropped to 80 percent in most housing markets, Kelly says.
"So on a $200,000 home, the most you can expect is $160,000," he says. "Our standards are probably in line with other lenders."
Marks says he hopes people's spending habits would change as a result of the limits on home equity loans.
But in some cases, tapping into a home's value may be the only option to get cash.
David Certner, AARP's legislative counsel, says he expects seniors over the age of 62 to become more interested in reverse mortgages.
Living expenses will continue to increase, and seniors on fixed incomes and no assets other than their homes will need to establish cash flow.
A reverse mortgage allows a homeowner to receive non-taxable payments based on the value of a home with a mortgage that has been paid. It is sometimes described as a house paying the homeowner back.
Certner says the U.S. Housing and Economic Recovery Act of 2008 makes reverse mortgages more attractive by:
- Raising the amount of equity homeowners can borrow against.
- Capping origination fees.
- Protecting seniors against inappropriate practices by lenders.
However, a reverse mortgage should remain a "last resort" for seniors because it is still an expensive proposition, he says.
The new housing law allows a maximum of $6,000 for an origination fee. The fee is based on the law's new scale of 2 percent for the first $200,000 of home value, and 1 percent per $100,000 of remaining home value, Certner says. Previously, homeowners were charged 2 percent of the home's value.
What to do: cash from your home
- Home equity loans aren't as viable in the current economy. It's better to find ways to control spending.
- A reverse mortgage may be the only way for some seniors to establish an income. But selling the home may net more cash for the homeowner.
- The new housing law requires homeowners to meet with a mortgage counselor before entering into a reverse mortgage. Use the meeting to review assets to determine if a reverse mortgage is the best option.
A reverse mortgage could use up the entire value of a home, and the homeowner is responsible for property taxes and home maintenance, which is why Certner suggests considering all options before using a reverse mortgage.
"It may be more appropriate to sell your home and move," he says.
Previously, seniors had fallen prey to being sold annuities, long-term care insurance and other inappropriate products by the same agents who sold the reverse mortgages. The new housing law prohibits this practice, but Certner says seniors should remain on their guard.
"Those products are rarely in your interest," he says.