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”Oh No – Not Again!”

Sigma Investment Counselors

June 25, 2012

A family member came to me a few years ago and asked my advice on a mortgage. The loan had originally been established in 2005 so I was not sure what prompted the query as I assumed it must have been a 15 year or 30 year mortgage, and interest rates at that time had not changed much. I learned that the mortgage they took on was an interest only, five year balloon, meaning there were no principal payments required, only interest for the first five years. But then, the loan had to be refinanced. This family member and spouse were in their late 50’s, were putting quite a bit of equity into the new house and planned to live there the rest of their lives. Therefore, the terms of the mortgage made no sense to me. I asked why they took on that type of mortgage and was told that this was what their mortgage broker recommended. The only conclusion I could draw was that this mortgage must have earned the broker the most money. Also, this family member had to go through the process of getting a new mortgage five years later, which meant more fees for the broker.

I mention this only because I fear that Ford and General Motors retirees are going to be convinced by conflicted advisors to take the lump sum distribution offers that their former employers are currently offering, not because it makes sense, but because the advisor may be able to collect fees and commissions when investing the proceeds from the lump sum distribution. We would prefer to believe that professionals would put their client’s interests ahead of their own, but all too often it fails to work out this way. Readers of these blogs – please share this message with friends and family members and be sure to advise them to get second opinions if they are advised to take the lump sum distribution. Taking the lump sum distribution is typically only advised if specific criteria are met, as per our recent newsletter on the subject.

As always, comments and questions are welcomed.

Bob Bilkie, CFA

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