The first part of the above title is the clear consensus of personal finance experts, while the second part represents my own two cents. Allow me to explain.

As a result of both the credit and economic crises, the financial situations for many retirees has become increasingly precarious. The stock market is recovering, but still remains well below its peak in 2008. Meanwhile, the worsening employment picture, combined with stagnating wages, have forced those nearing retirement to dip into their savings accounts. Even worse, many of these borrowers have been unable or unwilling to pay down their mortgages, carrying a significant debt burden well into retirement.

The statistics speak for themselves: “In 1992, 18% of Americans age 65 to 74 had housing debt, according to government data compiled by the Employee Benefit Research Institute. By 2004, that percentage had risen to 32%. And in 2007 — the most recent year available — 43% of 65- to 74-year-olds had a mortgage. The levels of debt have also risen. In 1992, the median amount of housing debt carried by those age 65 to 74 was $24,609; 15 years later, the median amount owed was $69,000.”

The results of this trend, unfortunately, also speak for themselves. “Americans 55 and older have been the largest age group to file for bankruptcy recently, accounting for 23  percent of the more than 1 million filings in 2007, according to AARP. Older seniors are even more vulnerable, with bankruptcy more than quadrupling for those from 75 to 84.” It’s not difficult to connect the dots. Making mortgage payments without a steady source of income is a recipe for disaster. This is especially true in the current lending environment, where banks are increasingly hesitant to facilitate refinancing because falling home values are eroding borrowers’ equity positions.

There is also a common-sense argument for paying down your mortgage early rather than investing it via a retirement account: “In the current environment, your mortgage provides a better return on your money than other risk-free assets. ‘It is unlikely that many retired households will be able to earn a return on risk-free investments, such as bank certificates of deposit, Treasury bills and Treasury bonds, that will exceed the cost of their mortgage.’

For homeowners that qualify, there is an alternative: a reverse mortgage. Reverse mortgages have gotten a bad rap recently, from no less than the comptroller of the currency, who compared them to subprime mortgages. While certainly subject to abuse and scams, reverse mortgages can nonetheless provide a valuable benefit if utilized properly, by enabling borrowers to “extract cash from their home and still live in it.” I’ve explained how reverse mortgages work in previous posts, so suffice it to say that this product will only become more popular as desperate retirees run out of other options.

Convention wisdom has always held that its best to enter into retirement without any outstanding debt, especially not a mortgage. That wisdom has been turned on its head as a result of the financial crisis, which devastated the savings of those approaching, or already in retirement. “Now, many people retire while still paying that monthly home-loan bill,” reports one source.

Despite the crisis, however, it turns out that common sense still applies: “It’s better to pay down your mortgage than to carry it into retirement. Or at least it is if you have the money set aside in a taxable or tax-deferred account.” This true for a couple of reasons. First, the return that you can expect to earn on your (retirement) savings is probably well below your mortgage rate, which implies that you are actually losing money by not repaying your mortgage. As a general rule of thumb, it’s always better to pay down your debt, so that you know exactly where you stand in your personal financial situation.

If you can’t afford to repay your mortgage before retiring, there is another option: a reverse mortgage. While there are several variations, reverse mortgages essentially enable you to draw-down the equity in your house, eventually freezing it at a certain level. Unlike with a conventional mortgage, however, there is virtually no risk of foreclosure. “Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services or home improvements.”

Of course, there are drawbacks. Namely, the costs can be significant and the mortgages are often deliberately complicated. “Borrowers should consider discussing the appropriateness of a reverse mortgage given their current financial situation and the other options available to them before applying for a reverse mortgage.” There is also the risk that receiving payments in connection with a reverse mortgage could render you ineligible for certain federal retirement programs.

But the benefits are just as manifold: “You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.” Portability means that you can take your reverse mortgage with you if you decide to move. Most importantly, you can use it to pay off your current mortgage, and move into retirement debt-free!

I have already blogged about the most important considerations that must be accounted for when deciding whether to refinance a mortgage. With this post, I would like to focus on a few “red flags:” attributes that should cause you to think twice about a re-fi.

The first red-flag is time. From a mortgage duration standpoint, it probably doesn’t make sense to refinance if you are close to (or already passed the halfway point) of your mortgage. For example, if you are 15 years into a 30 year mortgage and refinance into a new 30 year mortgage, you will incur significant additional interest, by effectively lengthening your amortization period by another 15 years. For a modest $200,000 mortgage, this translates into a whopping $60,000 of additional interest payments.

In this case, a better option would be to refinance into a new 15-year mortgage, the net result of which would be no change in the amortization period. If you’re considering such an option, it makes sense to first speak to your lender, who might be willing to modify your interest rate without compelling you to take out a new (i.e. refinanced) mortgage. If a loan modification isn’t an option, the next consideration is how many years you plan to live in your current house. Most experts use two-years as a benchmark; in other words, if you are planning on moving out within the next two years, it will be difficult for you to recoup the closing costs associated with the refinancing.

Red-flag number 3 is your age. If you are nearing retirement age, it probably doesn’t make sense for you to refinance, because then you ensure that you will be making mortgage payments from your savings/pension well into retirement. Who wants to be saddled with such a burden? The only exception is if you have already refinanced in the past and/or have very little equity in your home.

Instead, you might want to consider a reverse mortgage (see yesterday’s post), which allows you to pay off your current mortgage and essentially freeze the equity in your home at a given level (usually no less than 35% of the value of your home) and cash out the difference. As long as you don’t plan to move out/sell your home in the short-term (in which case you “forfeit” some of the proceeds), a reverse mortgage will allow you to remain in your current home indefinitely without having to worry about making mortgage payments (that you would otherwise still be making after refinancing your mortgage).

The final red flag is that you are refinancing for the purpose of debt consolidation/consumption, rather than to save on your monthly payments as a result of a lower interest rate. In recent years, cash-out refinancings have become very common, but I implore you to resist the urge, unless absolutely necessary. It can certainly be tempting to roll all of your credit card debt, auto loans, etc. into your mortgage, which almost certainly has a lower rate. But think of the implications of this: in doing so, you are essentially amortizing the dress you just bought or your car (both of which have limited time use) over 30 years! Besides, if the value of your home goes down, you are now personally on the hook for the difference.

As part of the Federal government’s plan to prop up the housing market and save the ailing economy, nearly $1 billion will be pumped a relatively obscure product known as a reverse mortgage, which allows seniors over the age of 62 to draw down the equity of their home. Under the new rule, HUD can now insure reverse mortgages up to $625,000, compared to $363,000 in 2008. Meanwhile, many states are rushing to pass similar legislation, both to make it easier for seniors to tap what for many of them is their largest source of equity, and to simultaneously prevent dishonest mortgage brokers from ripping them off in the process.

Despite superficial similarities, reverse mortgages are different from negative amortization mortgages and home equity loans, in that the loan does not necessarily need to be repaid directly by the borower, and there is no risk of foreclosure. Here’s how it works:

 ”Senior homeowners…receive proceeds from a lender — either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. Interest is  charged on the amount drawn, adding to the original amount and, thus, negative amortization. The borrower makes no monthly payments and cannot owe more than the value of the  home. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is due and repaid.”

Since there’s no exchange of title, it is the lender who bears the greatest risk, which is that the price of the house will decline below the value of homeowner equity. For this reason, most loans are limited to 50-60% of equity.

Reverse Mortgages are slated to become increasingly popular for a couple of reasons. First of all, retirement accounts have been devastated by the credit crisis and lower stock prices. In addition, layoffs caused by the economic downturn have created massive uncertainty, especially for those on the brink of retirement. Many have turned to reverse mortgages to lower their monthly mortgage payment (this is an option for those who still havn’t paid down their original mortgages) and free up cash for healthcare expenditures, etc. The result is that, “The National Reverse Mortgage Lenders Association expects 150,000 such loans to be made this year, up 30 percent over last year.”

The main drawback is probably the high upfront costs: “Taking out a reverse mortgage entails all the closing costs — origination fee, title, appraisal and the like — of a regular mortgage, plus specific fees, such as a monthly service charge.” Not to mention the reverse mortgage insurance premiums. Fortunately, origination fees are now capped at 2%, and almost all the fees can be financed into the mortgage. Still, these costs are significant and will be reflected in the payment(s) you receive.

Another drawback is that many unscrupulous mortgage brokers require borrowers to purchase an annuity at the same time as closing on the reverse mortgage. State governments are moving to ban this “cross-selling,” but it’s still possible that you will be cajoled into it. This isn’t to say that annuities are inherently inappropriate in this situation, but it’s still important to separate them from the reverse mortgage component.

In the end, only you can decide whether a reverse mortgage is appropriate for you. For more information, check out this great guide published by the AARP.

Every person who tells you that if you had only been saving x dollars per month for retirement for the last y years does not account for inflation. 100 years ago, in 1907, the real GDP per capita was $5649 of year 2000 US dollars, but actual wages were much lower back then.

The original 1936 bay bridge connecting Oakland to San Fransisco only cost $79.5 million, but that amount is roughly 1 billion year 2000 US dollars.

The same misperception also occurs when you think about saving for retirement and carrying the numbers ahead a few decades. If you think $2,000 a month is enough to live on, what $2,000 are you thinking? $2,000 of today’s currency, or what that will be worth after inflation by the time you retire?

Saving money gets worse when central banks pour money into markets. Last Friday this report came out:

Worldwide, central banks have injected at least $326 billion (179 billion pounds) into their financial systems in the past 48 hours in an effort to prevent a global liquidity crunch that has its roots in the riskiest end of the U.S. mortgage market.

In its biggest single day of temporary open market operations in nearly six years, the U.S. Federal Reserve added $38 billion in reserves in three moves, the first coming before U.S. stock markets began trading.

This week the following numbers were released:

Over the past week, central banks around the world have injected hundreds of billions of dollars in cash into the financial system. The European Central Bank has added over $200 billion to its market, and the Fed added $62 billion to U.S. markets. The banks are attempting to ease tense conditions resulting from troubled lending markets.

Its hard to get anywhere saving money when the printers are running overtime.

zFacts published an article about the US National Debt vs GDP

In 1981 the gross national debt, compared to the nation’s annual income, reached its lowest point since 1931, 32.5%. It could have been paid off then more easily than at any time in the previous 50 years. Despite his claim to hate the debt, Reagan instituted unprecedented peacetime deficit spending. This is not partisan politics, this is straight off the White House web site.

Currently about half of the US government’s deficit comes in the form of borrowing from social security:

The gross (total) deficit is bigger because it takes into account that when the fed’s general fund (mostly military spending) borrows money from the Social Security Trust Fund, it will have to pay it back. Borrowing from Social Security is still borrowing. Deficit lite, which Bush is talking about, assumes there is no such obligation — that Social Security will not have to be paid back. So the more they borrow from Social Security the smaller is deficit lite.

President Bush has been lobbying to strengthen social security by privatizing it. Currently the social security system has a surpluss large enough that it helps the government cook the books by over $100 billion a year, but in about 15 years it will start costing the government more than it takes in. When it does that you can guarantee at least one of the following will happen

• sharply higher taxes
• sharply lower social security payouts
• inflation (and rising interest rates) due to greater borrowing and an increasing currency supply

If you are counting on social security paying part of your mortgage you might be taking a big risk. Due to accouning fraud, the government is hiding nearly a half million dollars of debt owed by each US houshold. A recent USA Today article pegged the number at $516,348 per household. What happens to home mortgage interest rates the day we default on that debt?