Paul Winkler: All right. I’m back here on the Investor Coaching Show. Paul Winkler talking about the world of money and investing. So this week I interviewed a friend of mine who is very knowledgeable in reverse mortgages, she has been doing it for many years.
And I thought I’d share with you, one of the guys in the office says, “Hey, why don’t you take that video you just did and share it as a show segment.?” I thought, wow. Oh, that would be like a really cool thing to do because people ask about this all the time. So many people wonder how these things work. So what we’ll do is I’m going to go back to that interview. And what I’m starting off with right here are some of the other uses of reverse mortgages. How do people actually practically use them?
So we’ll continue on with that interview with Catherine Holton from New Castle Mortgage. She and her husband, Mike Gray, have run that company for many years. So we’re going to head back then. We’re going to talk a little bit about, well, some of the other uses of reverse mortgages. So that’s where we start out now. Some other uses, so somebody says, “I want to go on a vacation.” What are some of the other things that you’ve seen, you had to say, Catherine, I owe $50,000 on my house. I unfortunately had high interest, right?
I’d love to get rid of that. And I need a new car. I think I need $20,000. I’ll treat myself to a nice brand new car. Alright, so now we’re going to have a $70,000 draw at the closing table, but he’s going to have an additional $200,000 on this particular sitting off in the wings, in their line of credit, again, sleep better at night mortgage, knowing I just accomplished getting rid of that mortgage payment. I know I need to pay my taxes and insurance, and I’m going to get a new car because I’m 75 years old and I deserve a new car that can happen when somebody goes into retirement.
And statistically, what we find with people with retirement is that many people end up retiring sooner than they thought they would. You know, when your people are in their thirties, in the forest, never go on and retire. I’m going to work forever because I love my job so much. And then they get up into that age group and they’re like, no, I’m gonna retire on. There’s a new boss that got brought into our workplace. And I don’t like the person, blah, blah, blah, or whatever. I know. There’s always a reason where somebody goes. And then another reason is that, well, my spouse got sick. You know, I’ve had a situation. My spouse got sick, I got sick. I had a child, that’s got a sick. I know I have to retire. I didn’t plan on retiring right now. I planned on having my mortgage paid off before I retire, but I haven’t to retire five, six, seven, eight years before I thought I was going to.
Take the reverse mortgage, pay off the one that you’ve got. And then you don’t have payments act. I think to date, one of my most favorite stories, how a person used a reverse mortgage was this: they’re home was paid for. They needed to help their two grown children who were both losing their jobs. They worked at the same place. They were losing their jobs.
So mom and dad started borrowing cash on a credit card. And then we all know that’s what, 20% plus interest on a card. They knew they were drowning and they thought, what can we do? So they own, they had a set sum that they could have been applicable for more money. They said, Catherine, we only want $60,000. That’s how much we’ve racked up on these cards. We want them gone. So they took out the reverse mortgage. They took the $60,000, paid all of those credit cards. And then they made payments back to the reverse mortgage.
And now it’s almost paid off. Wow, they did. And you know what? The interest rate being so much lower at that time, it was low, it’s lower now, but it was a low interest rate. So they did a low interest loan against their house to get rid of the high interest debt and then decided to pay it back. They weren’t required to, but decided to do it well. And it’s insane because you know, you look at credit cards and it’s not unusual to see credit card debt, 18% interest rates and just crazy, crazy high interest rates, which means you’re debt actually doubles about every, you know, four to five years or so.
Catherine Holton: You know, it’s just, you end up drowning. I mean, you just can’t get out of it and to be able to do something like that is, is huge to me. Absolutely. And no one and the comfort of knowing if you wanted to make a payment, you are certainly allowed to think they can’t go anywhere. They always say to me, “Catherine, can I leave my house?”
Well, big brother isn’t watching you. You’re only going to get a one time a year annual occupancy letter that says, hello, Ms. Smith. Are you still there? Please check Yes and mail it back. In addition to that, you are going to receive a monthly statement. That’s going to always show you your balance. And let’s say you utilize that monthly line of credit. It’s always going to show you the balance of your loan and how much you have in available credit in your line of credit every year. Yeah.
What kinds of properties can you get a reverse mortgage on?
Now let’s talk a little bit about what kinds of properties you can get reverse mortgages on, you know, like condos versus homes versus townhomes versus, you know, yes, condos are always a bit contentious because they have to be FHA approved. Okay. The very short story about FHA condos is that FHA has decided a decade ago that too many condo complexes were becoming rented. So FHA is in the business of home ownership. They’re not in the business of insuring apartment complexes, so to speak. So there’s this certification that has to happen every couple of three years. And it’s a big process. I am very happy to help people do it at no charge. There’s companies out there that will do it for you.
There’s a big lit checklist that they have to meet, but condos are difficult if you call me and have an already approved FHA condo, we move forward. If you don’t, I can look into it for you. So condos are a little bit more problematic, but single family duplex, even for family properties, the borrower of the reverse mortgage, you must live in one of those units. If it’s a duplex or a fourplex.
Paul: So they’re very creative. It’s always got to be your primary residence, the reverse mortgage. Right? Okay. Now, when they actually go through this process of setting up such a mortgage, what is it like? What’s the process like I know you have to hire that. They’ll actually have to have somebody that has no dog in the fight. Yes. Counseling, but it’s a wonderful consumer protection device. The very first thing is that they communicate with someone like myself at New Castle Mortgage. And I’m gonna take all the time. They need to explain how this loan works.
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How it all works
Catherine: I like to listen to them. Typically they tell me what it is they’re trying to do. My job is to make sure they understand what their options are, how the loan works. When the loan is due, that they can sell it at any time, things of that nature. Once they’ve made that decision, I’m going to give them a list of ten counseling agencies. It became a mandatory part over a decade ago. Now they’re going to be talking to someone who’s not selling them something. So it’s wonderful; it’s typically a 30-minute phone conversation with someone.
There is a fee that they have to pay the counselor directly. It’s $150 or so a certificate is issued and there’s not a test. People are like, well, what are they going to ask me? And I hand them, I give them information that says, this is what you should expect. Right? And it’s, they’re going to ask you budget questions. They’re going to ask you. Well, have you thought about this loan versus going to a bank to go borrow $10,000 in a line of credit and every now and then that is a better option. I’m going to listen to them and tell them how this one might differ from that one counseling is done.
And then I come and see them. We fill out an application. That’s usually a couple hours. We usually sit at the kitchen table for a couple hours. I lead them with a copy package of everything they signed. Then I go and do all of the processing and ordering of the appraisal. Typically my process has been 30 days. The world is very busy here at the end of 2020. A lot of people are refinancing and such. So the timeframes are six weeks, maybe seven. So how are the interest rates set?
Credit lines and interest rates
Paul: You know, so when you talk about the typical line of credit that people will get it’s based on an index, the London interbank, there may be some changes in the future, but when somebody has a reverse mortgage, that note sets what those parameters on that loan would be. And interest rates are extremely low right now. Just something I’ve talked about a lot, simply because of the fact that the federal reserve and the entities out there responsible for interest rates want them remain very, very low because of inflation reasons right now, and because of economic growth reasons.
Catherine: So it’s been low for a very, very long period of time. And so this is something that’s very regulated. And just when we talk about regulating the protections that consumers have, it’s not like you have all of these different entities that are lone rangers out there running this thing in a manner where, you know, absolutely these banks are so regulated. The banks that we use are all of the big, the top, the same people that you hear on the television, the difference is, I’m the local girl.
And I’ve got a, I’ve got a long history of doing this. So I always recommend, please talk to someone who’s been in the business and knows what they’re doing versus a new person at some of the big banks, right? I’ve had some, some horror stories. It’s just being aware, knowing what you’re doing, you know, I want people to be so well-informed, I do not call back every other day. Like some of my competition, you know, it’s all about making sure that they’re comfortable and, you know, I’ve had people that will set up a reverse mortgage just simply to have someplace to grab money from, in a hurry. If they needed a couple of examples that might come to mind, let’s say that somebody has an investment portfolio and they just liked the idea of holding more equities than fixed income investments in the portfolio.
Paul: And they’re drawing an income on a regular basis. Well, one of the things that can be problematic and an investment portfolio is what’s called sequence of returns, risk. You know, you’ve got a market, goes up and goes down when the market’s going up. Everything’s great. Everything’s fine. When the market goes down, you’re having to sell equities when the market’s down. And sometimes people will have reverse mortgages so that when the market’s down, they just stopped their income. They don’t want to draw during that period of time. And they’ll pull money from the reverse mortgage to buy them time for the market to come back. And if they feel like, if they can pay back the mortgage, the money that they borrowed.
So that’s one example. Yes, because there are no penalties on this loan. We said, you can pay down, paid off and move and get another rebate. Only one at a time, but get another one. Yeah. And it may be that it’s just, there’s a, there’s a sale on cruises.
So we’re going to maybe go strike when the iron is hot. And then, you know, through the whole thing in this 2020 market mess that we’ve been in, not necessarily talking about stock market mess, cause the market in a lot of ways has come back, but just people losing jobs and people losing income, yes. Or wanting to help family, or just having the security of knowing that that money is there. They can communicate with the servicer of that bank.
Catherine: And within a couple of days, that money is either wired or mailed to them. Right. Anything else that we ought to be saying that I hadn’t said already? I think I covered it all. Well, you know, between the two of us, I think we covered it. I think we’re good. Yeah. I think we’re good. Well, so folks, you have any kind of questions about this. This is something I get asked about all the time. They want to know how this work is a scam. Obviously now there, there are a lot of great uses for reverse mortgage. Some people are like, I’ll never have a reverse mortgage.
Paul: And sometimes it’s just an emotional thing, but often it is an emotional yeah. Cause you know, I was taught never to have debt or anything like that. And, and, and I, you know, I look at it as a tool. You know, it’s not a tool for everybody. It’s like a hammer. It’s not a tool if I’m trying to screw in a screw, you know? So they’re there. These are all tools. I just want you to be aware that these things exist and when the situation is right, it’s a great tool and something that can be very useful for our clients. So thank you for coming, Catherine
Catherine: Always happy. I’m always happy to come and have fun.
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