Why in the world would I ever get a reverse mortgage on my home? That’s what we’re talking about today on Reverse Mortgage Radio. This takes us back to what we talked about last week as far as who’s an ideal candidate. So we’re going to recap that as well. I’m so glad you could join me today on Reverse Mortgage Radio. Hopefully, you’re having a fantastic day being safe and staying healthy.
You can stay healthy and not be safe, too. That’s more my motto. I like to drive fast and take chances myself. But my name is Bruce Simmons and I’m the reverse mortgage manager with American Liberty Mortgage. I’ve been doing reverse mortgages now for going on 18 years now that we’re in the second half of this year. I really like talking about reverse mortgages and explaining to people how they work. Answering why you might want to take a look at it, but not talking you into it. My whole goal with reverse mortgages is education.
I want to make sure you understand the pros and the cons of reverse mortgages so that you can make an informed decision as to whether or not it might work for you. People make decisions emotionally, and then use the facts to support their decision, either way they go. That’s part of sales. People always talk about that. You make decisions emotionally and then you back it up with statistics or rationale to justify your position, whatever direction you’re at. Two people can make totally different decisions and back it up factually with whatever they choose to look at. My goal is to give you both sides, hopefully. So you understand the pros and cons because not everybody is for this program, and not everybody’s against it.
I hate the saying, “Well, it’s not for everybody.” Nothing’s for everybody. But reverse mortgages are not for everybody. As we know. But let’s talk about why somebody would get a reverse mortgage.
However, before we do that, I always like to start out the program kind of explaining, giving you a quick overview, of what reverse mortgages are and a little bit about how they work. Most reverse mortgages are FHA-insured reverse mortgage loans. They’re called Home Equity Conversion Mortgages. That’s the FHA name for their reverse mortgage program. Other reverse mortgage programs that are not FHA approved are typically for higher valued homes and things. They have names like Home Secure or Home Safe Program or Home Platinum type programs, whatever the case may be. Anyways, the FHA name is Home Equity Conversion Mortgage. HECM. You’ll see that acronym if you start delving into the world of reverse mortgages. Home Equity, Conversion, Mortgages.
The way they work is they’re specifically designed for people that are 62 and over. They allow you to convert a portion of the value of your home into tax-free money that you never have to repay as long as you live in your home. Now, the home is still yours. You still have to pay your property taxes and homeowner’s insurance. However, there is never a mortgage payment required on a reverse mortgage.
You can make payments if you choose to while you’re living there. When you no longer live there, you or your spouse are no longer living in the home, the loan comes due. At that point, your heirs inherit the home. The biggest misconception I have been fighting for 17 and a half years, and I’m still fighting it, is that people think the bank takes your home when you die. No, nothing could be further from the truth. The heirs inherit the home. If they don’t follow the rules and do what they’re supposed to do, the bank will take the house.
So for example, the heirs need to call the servicer when you pass away or you can no longer live in the home. The loan comes due when you permanently leave the home. So if you’ve moved to assisted living permanently, then the loan will come due. If you don’t pay your property taxes or your homeowner’s insurance, then the loan will be due as well, even if you’re still living there. That’s why it’s so important that you realize you do have to pay your own property taxes and insurance on time. That’s a little side point.
So your heirs inherit the home. They have to contact the lender and let the lender know that you’re no longer living there. You passed away or you moved out to assisted living or whatever. So at that time, the heirs will want to sell the house or refinance it to keep the house. Either way, whatever equity is left in the house will go to them.
So if you owe three hundred thousand on the reverse mortgage and your house is worth five hundred thousand, and your heirs decide to sell the house for five hundred thousand. They keep the two hundred thousand dollars in equity. Equity is just the difference between the value of the home and the amount owed against it. If your home is valued at five hundred thousand and you owe three hundred thousand, there’s two hundred thousand dollars in equity in the house. That money will go to your heirs as long as they sell the house and pay off the reverse mortgage.
Or, if they want to keep the house, they can keep it. So they just have to pay the three hundred thousand dollars that is owed. They can either refinance it or if you leave them a big insurance policy or a big estate, they can pay that off. Or if they have it on their own, they can pay it off. It’s totally up to them.
So then the loan only comes due when you permanently leave the home. If you decide just to move and sell, the loan comes due and it has to be paid off. But while you’re living in the home, you’re still charged interest every month, even though you’re not actually paying it. So what happens is that interest gets added to the loan balance. The loan balance gets larger and larger and larger over time, and you’re going to see that on the monthly statement you receive. Every month you get a statement from the reverse mortgage company and it’s going to show your loan balance, getting larger and larger and larger. The reason is because the interest that you’re not paying out of your pocket gets added to the loan balance. Every month you’re going to get a statement in the mail, and as that loan balance gets larger, larger and larger, you’re going to see that on that statement.
If looking at that statement is going to cause you more stress than the benefits that you receive from the reverse mortgage, then just flat out do not do the loan. If the equity in your home is so important to you that that’s just going to cause you stress, then don’t do it. Now we’re going to talk about why a lot of people do. The key thing that I always want to drive home to all of my customers is that the loan balance is intended to increase over time.
Now, odds are, the value of your home is also increasing. And odds are, the value of your home is increasing faster than the loan balance is increasing. Let’s say your home’s appreciating at two percent per year and you have a four hundred thousand dollar home. If it appreciates by two percent, that means eight thousand dollars that you’ve gained in value on your home from one year to the next. Well, if you’ve got a one hundred thousand dollar reverse mortgage loan balance on your home and you’re being charged, let’s say three and a half percent interest. The interest is three percent and plus half a percent for mortgage insurance. I’ve done whole shows on mortgage insurance.
In fact, we’re already eight minutes into the show, and I haven’t given my phone number. You can call me with any questions about this at 303-467-7821. My name is Bruce Simmons and you’re listening to Reverse Mortgage Radio. I’m the reverse mortgage manager for American Liberty Mortgage right here in Denver. If you missed part of this show and you want to hear the whole thing, you can go to my website at reversemortgageradio.net and you can listen to the entire show.
I’ve got podcasts up on it. Every Monday my web guy posts the show from the last Thursday. So starting Monday of next week, this program will be on my website. However, if you go there tomorrow, you can still listen to three plus years worth of radio shows. In the past I’ve done whole shows about how mortgage insurance works. Thirty minutes of mortgage insurance. It’s thrilling. You should listen to it.
So anyways, let’s say you’re charged three and a half percent interest total. This is what we call the accrual rate, the rate at which the interest is accruing. So three and a half percent on one hundred thousand dollars, that’s only $3500. So your loan balance went up by $3500 in that year that you had the hundred thousand dollar reverse mortgage. But, your four hundred thousand dollar home might have gone up by $8000. Even though you have the reverse mortgage, you still gained equity in the home. Your home value went up faster than the loan balance did and the difference is the gain in appreciation.
Before I talk about why people get reverse mortgages let’s touch on last week’s program. Last week we talked about who is an ideal candidate is for a reverse mortgage. The fact is, this is no longer the type of loan that’s only used as a last resort. Or that it’s only for desperate people. A lot of people are looking at a reverse mortgage as part of their financial plan. More and more financial advisors are advising people, especially if they have a regular mortgage they’re making payments on, to get a reverse mortgage. They can either set the money aside in a line of credit, or draw a monthly payment out, or use the money to pay off an existing mortgage so they no longer have to pay that out on a monthly basis. So that whole thing kind of ties in to why people are using reverse mortgages.
I like to reference this book. This is probably the best book that I’ve ever read on Reverse Mortgages by Dan Hultquist. It’s called “Understanding Reverse 2020” and you can go to his website at understandingreverse.com and you can get this book. I highly recommend it.
A couple of years ago he wrote “Understanding Reverse 2018”; he updates it every year. In this book there’s a chapter about the most popular ways people draw money out from a reverse mortgage. “What are common uses for reverse mortgages” I think is the name of it. What he does in here is he breaks this down into three categories: using a reverse mortgage for an immediate need, using a reverse mortgage to enhance your lifestyle, and using reverse mortgage for a financial plan or part of a financial plan. Those are the key categories.
We’re going to delve a little bit deeper into each category. The nice thing about this book that I really absolutely love, is it’s so simple. Every chapter, every topic, he discusses is two pages long. Dan Hultquist is so concise in the way he does the chapters that he can wrap this all up in two pages. Sometimes, because I like more explanation, I’ll delve into a little bit deeper stuff.
If I were to write a book, each chapter would probably be about thirty five pages. I have my consumer guide on my website, “Colorado Consumer Guide for Reverse Mortgages”. I think it is a pretty good guide. I wrote that in 30 pages. It’s very informative and you can go to my website and get it for free at Reversemortgageradio.net.
Let’s talk about the different ways people use a reverse mortgage. Immediate need. Let’s talk about that first. When I first started in 2003 we looked for people who were what’s called need based borrowers. People who have a need right now. They’re in financial trouble or they can’t pay their taxes, or they need money to bail out a kid sometimes. I’ve always done that for people. It’s amazing the number of people who have adult children that get into financial trouble. I’ve done loans for people who’ve bailed their kids out of foreclosure, numerous times. I’ve done multiple loans for people to pay bail to get their kids out of out of jail for different reasons. These are people who need money now, and the reverse mortgage can really help them.
Others are not necessarily desperate. Maybe you need money because you need medical equipment. Maybe you your family needs help. Maybe you’ve got adult children that are unemployed and are having trouble making their own mortgage, due to no fault of their own.
I was reading an article recently about how the pandemic has caused all the unemployment which has caused people’s retirement to be less secure. There was a study at the Boston College Center for Retirement Research. They have this terminology, they call National Retirement Risk Index, where basically before the corona virus, 50 percent of people were at risk for not being able to maintain their same lifestyle when they retire. That’s gone up, because so many people are unemployed, to fifty five percent. So fifty five percent of the households in America right now, not just senior households, but households, are at risk of not being able to maintain the lifestyle that they want in retirement. Maybe you’ve got adult children that are in trouble because of this.
People always say, “Well, the pandemic caused this or that”. No, it didn’t. The pandemic didn’t cause anything except for the government to act stupid and shut down things. I don’t like the way the government has responded to this whole pandemic stuff by setting all these rules and closing. I don’t think they should have the right to close down a lawful business that’s conducting business lawfully. But either way, I’m not going to get into anymore. I’m not a big fan of government at all, although I encourage, and I am a spoke in the wheel, for FHA. Talk about hypocrisy, right?
Anyways, so immediate needs. That’s one use that people do. In some cases, they were laid off and that would be an immediate need. Now they say, “I need to do a reverse mortgage because I can’t get a new job because I’m sixty three years old”. There is age discrimination in the workplace. There really is in some places depending on what you’re trying to do.
OK. The second category is to enhance lifestyle. Because reverse mortgages don’t require a monthly principal and interest mortgage payment, obtaining one can help with cash flow. So, for example, you use it to pay off your existing mortgage. Now you’re saving yourself $800 in principal and interest payments because you no longer have that mortgage payment. That saves you money. Now you’ve you’ve got $800 more every month that you can spend on other things. Maybe you could save for a trip to see your grandkids. Or, maybe you could pay off other debt quicker. Or, maybe you just have more money to golf and go out to breakfast and things like that. Or, join a service organization like Rotary or Kiwanis or Lions or something like that. And you can do that comfortably.
The key thing with reverse mortgages is you want to be able to live comfortably with a reverse mortgage. It is intended to relieve financial stress, not create it. That’s why I harken back to the fact that the loan balance grows over time and that you really need to understand that fact going into it. If you don’t like that, then it’s going to cause financial stress, when the whole goal of the reverse mortgage is to relieve financial stress. That’s a key thing that I always like to focus on. Having that extra money every month can relieve a lot of financial stress.
Also another thing that relieves a lot of financial stress is just knowing you have extra money available if you need it. If your furnace goes out. Furnaces always go out at the worst time. Or, your AC goes out on the day this week when it’s 100 degrees. I remember a few years ago, my furnace went out and it took us three days to get a new one. And those were the three days that were below zero. It was January or February, and of course, we overpaid for a furnace. It was a great furnace, and it’s been running great ever since. But, we paid a lot of money for it because we were in need. We had to have it right then. Luckily, we got financing for it, and it’s just about paid off now three, four years later.
But with a reverse mortgage, you don’t have to do that. You could put it on a credit card and then you can take the money from your line of credit, and pay off the credit card when it comes due. So you’re not being charged interest. In fact, if you’ve got points on that credit card, or you get cash back on that credit card, and you spend eight thousand dollars on a new furnace, and then you just pay it off the next month. Well, now you’ve just earned all those extra points on the credit card because you spent all that money and you didn’t have to pay interest on that credit card. You will be charged interest on any money you take from the reverse mortgage. But, that’s down the road, that’s a deferred interest.
The other thing is, you could receive a monthly payment. A number of people set up monthly payments where you receive a payment every month.
Let me touch on this very briefly. There’s four ways you can draw money from a reverse mortgage. You can set it up where you receive a monthly payment. Every month we deposit money in your bank account. It could be one hundred dollars. It could be a thousand. It could be two thousand, whatever the case may be. You can also set up a line of credit. And I’ve done numerous shows on the benefits of lines of credit. I think that’s the best way to do it if you’re in that situation and it makes sense for you.
You can also draw all the money out to pay off an existing mortgage on your home. Or, take out money to pay off other bills if you want. Up to a certain point, because the government limits the amount of money that you can draw from in the first 12 months of the reverse mortgage. Keep that in mind.
We only loan between 50 to 70 percent of the value of the home, too. So if you’ve got a mortgage that you owe 80 or 90 percent of the value of your home on, we’re not going to be able to loan you enough money to pay that balance off.
However, I’m doing two loans right now for two different people. One couple’s bringing fifteen thousand dollars to closing because we can only loan them a certain amount and they are fifteen thousand dollars short. So they’re bringing money from their savings and they’re going to pay the difference. So their loan will be paid off. They will not have access to any additional money from the reverse mortgage, but they’re getting their mortgage paid off.
In another case I’m working on right now, I’ve got two going at the same time, these people are going to bring about sixty three thousand dollars to closing. But, they’re getting out of a big fat mortgage payment and it’s going to help their retirement in the long run.
It just depends on people’s needs. There’s the monthly payment, the line of credit, the lump sum, or any combination. If you wanted to you could take out ten thousand dollars and set up a five hundred dollar payment and leave $50,000 in a line of credit. Depending upon your situation it is very possible we could do that.
Now, there’s different ways you can set up a monthly payment as well. For example, I’m talking to one listener right now. She called me last week from the radio show and she said, “Well, I think I want two thousand dollars a month”. She owns her home free and clear. Then she said, “well, let’s settle for twelve hundred”. She thinks she can make it by with twelve hundred. She wants to delay receiving her Social Security income until she’s at full retirement age. That’s the next step. It’s part of the financial planning. But she’s setting up a monthly payment.
In her case, because she’s only 62, we have to allow for a 20 plus year payout on this. So in her case, if she sets up a payment it’s guaranteed as long as she lives in her home. If she lives to be 90 or 95, and she’s still living in her home, she’ll still get this guaranteed payment of $875. Or, we could pay her twelve hundred a month if she wants, and set up a line of credit. If she wants that twelve hundred dollars over 20 years, we can do that, and set up a line of credit of say $15,000. I don’t remember the exact numbers. Or, if she wants a shorter term, a 15 year, $1200 a month payout, we can set up I think $50,000 in a line of credit.
So there’s all kinds of ways you can use this. That’s the benefit of the financial plan. Also the monthly payment can be part of your lifestyle. Just just imagine if you’re on a fixed income and your Social Security is only $850 a month. Getting an extra five hundred or thousand dollars a month can dramatically increase your standard of living. So keep all that in mind, that’s a lifestyle.
But then it’s also part of the financial plan. Financial planners are recommending reverse mortgages more and more for their clients. A lot of the borrowers have a disproportionate amount of their retirement savings held in their real estate, their home. So drawing part of their equity out, either in the form of a monthly income or setting it aside in the line of credit, can be a very big benefit for people. It can help extend the life of their retirement portfolio.
Maybe they only have $100,000 left in their retirement and they’re only 70 years old. Well, you can go through $100,000 like that, if you get sick. You know what I mean? Or even if you want to maintain a certain lifestyle. You could burn through money real fast if you’re only getting $1500 a month in Social Security and your budget is $3000. So just imagine how that would go.
But if you have a line of credit, it can also help out if you have money in the stock market and the stock market drops. You can pull money from the line of credit if you need it and leave the money in the stock market so you can bounce back. Just imagine if you’d taken money out when when the Dow was down right after the government started shutting stuff down and the stocks dropped by, what, 30 percent. Then suddenly you needed to take money out to pay for your kid’s college, or for a major home improvement, or a trip. Well, your trip was probably canceled. But, either way, you could use the money from the line of credit instead of drawing the money from a depreciated asset, meaning your portfolio when the stock market is down.
So keep all that in mind it’s part of a financial plan. Also, if you have an existing mortgage on your home, using the reverse mortgage to pay off your existing mortgage can save you that money. So if you save yourself $800 a month by paying off your current mortgage payment, that will extend the life of your portfolio because you’re not having to draw that money out to pay the mortgage. That’s just common sense right there. Anybody who has a mortgage on their home and they’re in retirement, or they’re being forced into retirement, or you want to retire and you have got this mortgage payment, you should do a reverse mortgage. I firmly believe that. Pay off your existing loans so you don’t carry that debt into retirement and have to burn your retirement savings paying that mortgage payment. Why not use your equity in your house for that?
My name is Bruce Simmons and you’ve been listening to Reverse Mortgage Radio. My direct line is 303-467-7821. You can also reach me online at reversemortgageradio.net. I’m the reverse mortgage manager for American Liberty Mortgage here in Denver, and I’d love to talk with you about your situation. We can run numbers to see if it makes sense for you.
Thank you so much for listening. And I hope you have a great day. Feel free to call me. I’d love to talk with you and meet you sometime. Have a great day.
