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Money Talk: Oct. 6, 2013

Dear Liz: What are your thoughts on charitable giving? I hear about tithing (giving 10 percent of income) but would have real problems trying to maintain that commitment. That said, I’d like to become a regular donor to a reputable charity.

Answer: Most U.S. households give to charity, according to the Center on Philanthropy at Indiana University, but the average contribution rate for those who give is closer to 3 percent than 10 percent.

If you want to step up your charitable giving, take the time to plan and prioritize as you would any other part of your financial life.

Making larger donations to a few charities is typically better than scattershot donations to a bunch of causes, said Ken Berger, the president and chief executive of nonprofit watchdog Charity Navigator. Charities spend money to process donations, and those costs tend to eat up more of small donations, he said. A $100 donation to a single charity might incur $2 in processing costs, leaving $98 for good works, Berger noted. The same $100, spread among 10 charities, would require each to spend $2 for processing — leaving just $80.

Because smaller donations don’t benefit charities as much, some are tempted to increase their “yield” by selling your information to other charities or repeatedly hitting you up for additional contributions, Berger said. Giving more allows you more leverage to ask that your information not be sold and that the charity limit its appeals.

You can research charities at websites such as Charity Navigator and GuideStar to make sure you understand their finances and how effective they are in reaching their goals.

Finally, consider setting up automatic donations rather than rushing to make contributions at year’s end. Some companies have payroll deductions for charities, or you can set up a recurring charge on a credit or debit card. Making your contributions automatic helps ensure you can achieve your charitable giving goals. It’s like saving or “paying yourself first” — when you don’t have to constantly remind yourself to do it, it’s more likely to get done.

Dear Liz: All my friends have said I should get a reverse mortgage to be able to live more comfortably and still stay in my house. I would think our greedy banking system would give you only 50 percent of value and have a high interest rate that would chew up the remaining value. What is your advice on the merits of this option?

Answer: A reverse mortgage program that lets you tap too much of your home equity wouldn’t be in business very long.

Reverse mortgages allow people 62 and older to borrow against the value of their homes without having to make payments on the debt. Instead, the amount they owe typically increases over time because interest is charged on the loan, and that adds up. Lenders get paid back when the owner moves out, sells the house or dies. If the house is worth less than the debt, the lender (or more often the insurer) suffers a loss.

Too-generous lending standards have already caused trouble for previous iterations of the Home Equity Conversion Mortgage, the federally insured option most often used by borrowers. Too many borrowers grabbed big lump sums up front, straining the program’s reserves and leaving the borrowers with few options if they ran into hard times later. Defaults rose as borrowers failed to pay their property taxes and insurance premiums as required.

The Federal Housing Administration, which insures HECMs, has tightened the rules so that borrowers can access less of their equity upfront. Fees also have increased.

How much you can borrow using a HECM depends on your age, the home’s value and current interest rates. Interest rates for lump-sum withdrawals are fixed, while those for lines of credit you can tap over time are variable.

You’ll certainly get a better (or at least less expensive) deal if you borrow 60 percent or less of your home’s value. The mortgage insurance premium for loans below that level is 0.5 percent of the home’s appraised worth under the new federal government rules that go into effect Monday. Those borrowing more than 60 percent face a premium equal to 2.5 percent of the home’s value. That’s in addition to a 1.25 percent annual mortgage insurance premium.

There’s no getting around the fact that these are expensive and complex loans. They’re usually not a great choice for people who have other assets to tap. They also can prove a land mine for people who drain their home equity too early and wind up with no resources later in life. On the other hand, they can provide a more comfortable retirement for those who would otherwise be strapped for cash, particularly if the borrowers opt for a steady stream of monthly payments rather than the upfront lump sum.

If you are considering a reverse mortgage, you should talk to a fee-only financial planner who is familiar with the program and who can review your other alternatives.

Liz Weston is the author of The 10 Commandments of Money: Survive and Thrive in the New Economy . Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, Calif. 91604, or by email at liz@lizweston.com. Distributed by No More Red Inc.