Paul Winkler: This week I had a friend of mine come by and we did a video. Something I get a lot of questions about is reverse mortgages and how they work. You know, these things you see on TV, are they a scam? What are they? What, what makes them tick?
What is a reverse mortgage?
How do they work? How do you use them? Who might want to get one or look into it? Who might not want to look into it? What are the pros and cons expenses and all of those things? So we did a video, it will be two segments. But I think it’s something that’s really worth checking out. So I’m going to go straight to the interview right now. Check this out.
I am here for this video with one of my favorite people in the world, Catherine Holton, New Castle Mortgage. And one of the things I get asked a lot about are reverse mortgages. So I want to talk to Catherine. She has been doing this a long time and really knows this area inside and out. And it’s an area that rules are always changing. Yes, they are. I mean, constantly, there’s some kind of a new rule that you’ve got to abide by how these things work. People see the commercials on TV and they wonder, what is it?
Catherine Holton: Is this a scam? What is it?
Paul: How’s it work? I have people, a lot of clients that use reverse mortgages as a tool. And I hope we hit everything. We’ll go through a lot of different things, but what I want to talk about is the uses of a reverse mortgage. So let’s talk a little bit about what one is, how about start off there, and then talk about how they’re used, the different forms, the different types of ways you can get access to the money in your equity, in your home.
Catherine: The biggest surprises that people have is knowing that this loan has been around for three decades already. They think they’re so brand new because the last, what, seven to ten years, the airways have been blitzed with all of the Hollywood stars saying, take my reverse mortgage. So really not the best word for reverse mortgages. Heck I’m home equity, conversion mortgage. We in the industry would love to start calling this loan because it truly tells us what it is. People think of reverse mortgage means you just don’t have a mortgage, which that is not true. This is a mortgage against your property, simply converting equity into usable money
Paul: And the form that most people have. Now, there’ve been lots of different forms over the years where you can use it for, let’s say, just getting access to your equity in your home. That’s probably what you see most often.
Catherine: That is a very, that’s probably becoming the most widely used part of the reverse mortgage is the line of credit. Okay?
Paul: Yeah. So who can get these things?
Who can get a reverse mortgage?
Catherine: You have to be 62 or older. There can be a younger spouse. And we would always calculate off of the date of birth of the younger borrower. So one of the positive changes that’s happened in the last five years or so is that HUD now allows a younger, a borrower under the age of 62 to be on the loan and stay on the loan. That is a big, positive change. Prior to that, that person would have to leave the premises. If let’s say the husband was older and took out that loan. So that is a wonderful new change.
Paul: That’s where you, yeah. That’s where you may have heard about people. You hear the horror stories about somebody losing the home and that’s where it would happen. So when you hear those types of things, a lot of times it was that the person was under 62. The person passes away that’s over 62, the one who had the loan and then all of a sudden bam. You know, you can’t do this anymore.
Catherine: You’ve got to go. The only time a person can ever get into trouble with a reverse mortgage is if they don’t pay their property charges, a very, very important part of this loan: pay your property taxes. You keep your own homeowners insurance, pay it on time. HOA, flood insurance, if applicable. That really is the only way a person is going to set is with the bank. Say, if you have no way to pay those property charges, you gotta go.
A simple example
Paul: Okay, let’s see. So let’s use a simple example. So people kind of get what this is. Let’s say that somebody has a $400,000 house. Let’s just use a nice round number like that. And they’re 62 years old. They can get access to some of the equity as they get older, they get access to more of the equity. And we’ll get into that a little bit as we go. But approximately if husband and wife are both 62, approximately what percentage of the property?
Catherine: It’s approximately a 50% loan. Okay. A little over 50% now because currently rates are so,
Paul: Oh, wow. Okay. So 50%. So you can get access to $200,000 of the equity of the home. Now, in essence, the beauty of the reverse mortgage, unlike a regular mortgage, regular mortgage, you go and borrow $200,000. You’ve got to make payments. A lot of people are under the impression that when they die, the bank owns their home.
Catherine: That could be farther from the truth. When you do a reverse mortgage, you always own your home and it’s still titled in your name. This is a lien against the property. You are not required to make a payment, but guess what? You can make a payment. And a lot of people utilize this at different times in their life to pull from, let’s say their line of credit. Then they have a better time in the market and maybe want to pay it back down, which would then increase their line of credit again.
Paul: You can make payments on these loans. I tell people, you can make pays. If you feel like paying off the doggone mortgage, you can. Most people don’t, but you can do that as well.
Catherine: Get down, pay it off and sell it anytime you simply pay the balance with it.
Would you like personal help with your financial plan? Schedule a call with us to explore what this can look like for you here.
Or schedule a more in-depth, virtual or in-person meeting here.
Why banks are willing to do it
Paul: So here’s the idea. I’m going to give a number example, just to get the, I like to explain this to people. I’ve got a $400,000 home. I’ve got $200,000. Let’s say I run the reverse mortgage all the way up to the Hill to $200,000. I borrow all of the money just to keep this really simple. The idea is that the bank looks at this and says, “we’re willing to do this because the house will probably continue to grow in value. And what happens is the interest gets added to the balance of the mortgage as well. But it probably won’t eclipse it because of the fact that the house is going to keep going up as well.
But if it does, there is insurance that is purchased on the front end to prevent the bank from losing money. So that is why they’re willing to do this. Some people go, why are they willing to do this? And then what happens at death, before we get into that, insurance is the heirs get to sell the property. They sell the property, they pay off the balance of the loan and whatever that is. And then the rest is there. So that’s why the bank doesn’t get the house. And I want to make sure you get that, but let’s talk about that insurance because that’s changed over the years.
Catherine: The FHA mortgage insurance is a rather pricey insurance. It is 2% of whatever the appraised value is, but that money is there to ensure that the family will never be saddled with that debt upon death. If the balance of your example of a $400,000 house, maybe the value appreciated up to $450,000 but the loan after 25, 35 years has now grown to $550,000. The family is not saddled with that debt. If it is greater than the value of the house,
Paul: It’s a permission slip. As I like to, it’s a permission slip to allow you to get access to this the way I like to explain it. Yes.
Catherine: That’s when the bank can take over and then sell the property. But there’s also a provision for a family member to buy the house back with a brand new appraisal. The family can then buy it back at 95% of the new appraisal, the FHA mortgage insurance still pays off that much higher than the value of the price.
Paul: So yeah, there are a lot of protective features in here. Now let’s talk a little bit about, so we know what the expenses are going in there. There’s some of that, that’s the big one right there, insurance costs.
Catherine: The FHA mortgage insurance. We’ve had a lot of adjustments through the years from no mortgage insurance to a half a point to two. It’s straight across the board, 2%. There’s also a loan origination fee. That’s how folks, the loan originator, like myself and New Castle Mortgage makes money. The remainder of the fees typically are the smaller ones are simply the credit report, possibly part of the appraisal. There’s a document prep fee that goes to the bank. And then simply the title fees, the title, attorney, title, insurance, and recording.
Paul: Now this isn’t a literal thing. You go to a regular bank, and there are companies that actually specialize in these types of mortgages. Yes. So talk a little bit about that. How do you end up doing that?
Catherine: You mean to start the reverse mortgages? How did you get into that? Mike and I, my husband and I, opened New Castle Mortgage over 13 years ago because we saw such a great need for this product, but I was doing other mortgages prior, a lot of FHA, VA, and conventional. And when we’ve read about this, we just thought it was such an incredible opportunity to keep seniors in their homes, more comfortably. I’ve done this loan on farmers. I’ve done this loan on multimillion dollar properties. FHA caps have a certain number on higher valued properties, but it keeps people in their home safely and they get to make the shots.
They get to decide. My job is to make sure they know what their options are. Sure. What kind of product of the three basic ones do they want to utilize? So three basic ones go through the three basic, there is one that is a fixed rate option that gives you a one-time allotment of cash. To be honest, I’ve not used it in a few years because the interest rates currently are so low. The other two products, the line of credit or a monthly income are generating so much more equity conversion that it’s making much better sense for folks to utilize it.
Paul: I think from a financial planning standpoint, the other ones make more sense to us.
From a financial planning standpoint
Catherine: I agree. I always tell people, if you do not need that lump sum of money, that’s not a good option. I’ve not done one in several years. It’s just goes to show you that people are listening.
Paul: The one that you might use. Let’s say, if somebody says, I’ve got this house and it’s a $200,000 house, and I really, really, really want this $400,000 house. And you know, I don’t have any loan on this house. It’s completely paid off, but I’d have to borrow money. If I were to buy that $400,000 house. And what I’d like to do is sell this house, take the equity, apply to the purchase of this $400,000 house, and then do a reverse mortgage on the rest of it.
Catherine: It has to be the primary residence. Right.
Paul: Right, right. Yeah. So it will be on the new house that we buy. Because we sold this one. Yes.
Catherine: And right now there’s a reverse for purchase that FHA allowed us to do about ten years ago. I’m so happy that all of my efforts and talking to real estate agencies are finally paying off. People are listening. Yeah. They’re getting solar downsizing. They’re taking their $800,000 house. They might have $400,000 or $500,000 to put down all of that on the new house. Why not utilize the reverse for purchase, put down half of the purchase price, retain your money.
Paul: So, yeah. Okay. So, so in, in essence, a little bit of the opposite of what I was saying instead of moving up, because most people don’t move up, but some people do some people, yeah. They go in, they’ll sell this house, that’s on two levels and they want to buy one. It’s all on one level and it may cost more and it may be in a more expensive area. So they may have to do that. But that’s another way of doing it right there. So that’s one way that these, I see these being used in the purchase of a new home or implemented in retirement. Another way is I’ve had people say, you know what, we’re not getting any younger. I want to travel. We want to travel. We want to do things before we can’t do them anymore. And it would be just nice to have some little repository of money that I could get access to for us to take cruises every once in a while or do something like that. And you know what, here’s the reality, our kids, when they get this house, they’re just going to sell the thing. Anyway, they’re not going to keep it. Cause that’s always, I always ask people now, where are your kids going to do with a house? If they inherit it, they’re just going to get rid of it. Well, you know what, help them out here.
A line of credit
Catherine: Part about this line of credit really honestly, is once we have set up that loan, maybe they don’t even need any money at closing. They simply want to convert. Let’s use the example of a $400,000 house. And let’s use that. Let’s just use $200,000 as our loan. They’re going to put it in their line of credit. The $200,000 that’s sitting there. It’s not part of the loan. It is not accruing interest, right? Because you haven’t pulled it out yet. The only charge was initially to set up your loan. But I have always called that the sleep better at night mortgage, knowing you’ve got a pool of funds that can never be closed.
You don’t have to make a payment on it because it’s not part of the loan. Let’s say you draw $10,000. It then gets added to the original loan, which usually consists of just closing costs. Right? And so now you have your closing costs, plus your $10,000 plus each month, you’re accruing interest. But this line of credit over here also has a nice feature that is going to grow for you over time.
Paul: In which you’re saying, here is this. And I like, I have ways I like to explain things using some numbers, but let’s say we have the closing costs on it. And the closing costs are $10,000 or whatever. So what happens is I have the house, I’ve got the amount that they’re going to give me access to. And people don’t typically, I don’t think do they actually pay the closing costs without pocket money? They usually just put it in the loan. So, they immediately have a loan that is there.
Obviously you don’t have to make payments on it, but it’s just there. And then that will grow with whatever the interest rate is; that small amount will grow with whatever the interest rate is. And then every once in a while, if they want to write a check off it, they’d go and write a check off it. Now the loan starts to grow. But here’s the thing, the interest. You know, if you had borrowed the whole $200,000, there would have been interest on that amount of money that would have been charged, had you pulled that amount out.
Well, that interest actually, because it’s not being paid and it’s not owed gets added to how much you can pull from it. So that’s what she meant by that. The line of credit grows over time. If you hadn’t pulled it all out, that line of credit actually increases. So that gives you access to more in the future. Again, the sleep better at night mortgage.
Want to talk with us directly?
Schedule a call here.
Ready to meet with us virtually or in person? Schedule a meeting here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase or sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.