Reverse mortgages, and what to weigh

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What it is

1. Is it right for you
2. What a HECM actually is
3. How it differs from a HELOC

What to weigh

1. Running it through the model
2. The monthly payment option
3. Rates, programmes and timing
4. Access, and what you leave behind

Is it right for you

hey welcome to another fun lesson where we are going to continue the theme of thinking outside the box in this lesson we are going to talk about how to use a heckum mortgage to pay for part of your retirement now the first question you're probably having is what in the world is a heckum well I will of course dive into that and I'll explain exactly what that is and how it can really increase your retirement income but before that let's go ahead with another little quiz now this one is a little bit different than the quiz when we were talking about mortgages in that quiz I asked you some uh true or false questions and you probably said true to a lot of them and we learned in that lesson that the answers were mostly false in this particular quiz there is no right or wrong answer this is just literally a yes or no question that you need to ask yourself for example is your house your largest asset for some of you the

answer might be yes for some of you the answer might be no how about do you ever plan to sell your house a lot of people plan on selling their house to downsize maybe move from an area where it's really expensive to an area where it's less expensive during retirement some people plan on living where you're at the rest of your life for example we just bought this or we just bought yeah this six acres and we built our Dreamhouse and we're hoping that our next move is in a pine box so we are planning on staying here forever but some people have every intentions on moving so just a question yes or no how about do you ever see yourself um needing access to your home equity do you think you might need access to some of that home equity or do you think you've got everything else taken care of yes or no how about is leaving a paid off house to your heirs a primary objective so do you want to leave

your house to your beneficiaries something to think about do you see one of your heirs living in the house so maybe you want to leave them the asset or the value of the asset maybe you want to leave a legacy to your heirs but maybe you can't see any of your kids wanting to actually live in the house so they might just sell the house if you left them a house that was paid off it's just part of their inheritance right maybe they'll just sell it will they want to sell it when the Market's down will they wait until the Market's up will one kid want to sell it because they're desperate for the money and maybe another kid wants to wait until the Market's up lots of things to consider but is that something yes or no how about is a is making mortgage payments during retirement a concern most people probably say yes to this I know a lot of people are trying to get that house paid off so that they don't

have a mortgage payment now of course in our mortgage module we are talking a lot about mortgages and hopefully shedding A different light on mortgages but nonetheless you know is not having a mortgage payment one of your goals true or false no matter what you've learned yes or no all right so let me ask you some more questions if there was a product that would offer a home equity line of at least 50% of the value of your house okay so you could just have a home equity line of credit up to 50% of the loan of your house or more at least not up to sorry at least 50% of the equity of your home and that equity line could only increase increase regardless of changes to your property value so if the property value goes down it doesn't change the home equity line of credit but if the property value goes up it would actually increase your line of credit how about no monthly uh payment requirement on any withdrawals so how would

you like to have this home equity line of credit where if you take out a withdrawal or borrow against that home equity line credit how would you like to not have a payment associated with that loan how about no settlement requirement until you die or move or sell your house so in other words you borrow this money against your house or using this home equity line of credit and then there's no settlement meaning you don't have to pay up that loan until you move sell your house or die okay think about that how about all withdrawals are received income tax free now if you refer back to our tax module you can learn how valuable this taxfree income is and we haven't even gotten done talking about taxfree income we've still got a lot to talk about with taxfree income but that power of taxfree income how valuable is that to where you can actually access money income tax free now think about that with our qualified plans module in our qualified plans module we

were talking about the potential of having your income increase right and then whole hopefully retiring at the same level of income as when you were working in your latter years right which would theoretically mean that you would be in the highest tax bracket of your life and taxes might go up but what if you could actually live on a loan in retirement that you don't even have to pay back or make any payments on it until you move sell or die something to think about all this money income tax free how about interest only charged on funds used so you're only paying interest on whatever money you use it's like a true line of credit right you don't have to pay any interest on it unless you actually use it and last all this is ured by the federal housing Administration a US government agency that has been part of the Department of Housing and Urban Development since 1965 so if there was a product that had all of these features would you want it

What a HECM actually is

so what is a home equity conversion morgage mortgage and what do you know about a home equity conversion mortgage is this heckum as they sometimes refer to it as is this something that you've ever even heard of before well remember this represents everything you know this is your box of knowledge and once again maybe there is some information outside your box of knowledge and we know that we have a couple of options either number one ignore that information or number two actually get a bigger box so common reverse mortgage misconceptions yes a heckum or a home equity conversion mortgage is also known as a reverse mortgage now if you're like a lot of people the minute you hear the words reverse mortgage you jump to a lot of conclusions like when you hear the word annuity or when you hear the word life insurance you know a lot of these things we jump to conclusions from what we've maybe heard of in the past for example one of the common misconceptions is it is a

product for desperate people with no other options well a reverse mortgage is a powerful tool and can be a very important part of your overall financial plan from paying off an existing mortgage to generating non- taxable cash flow to delaying Social Security or even creating an emergency line of credit the reverse mortgage is a highly flexible product in fact with recent changes to the product and the security of the US Department of Housing and Urban development's a FHA insurance many financial planners have begun incorporating a reverse mortgage into the retirement income discussions how about the bank will take my home if I get a reverse mortgage well lenders are not in the business of owning homes they wish to make loans and earn interest the homeowner keeps the title to the house in their name the lender adds a lean onto the title which is the same for any mortgage a regular mortgage or home equity or a reverse morage mortgage the lean helps ensure that the lender will eventually be repaid when the loan

ends how about it is expensive high costs well mortgage loan origination costs and interest rates are typically comparable to standard conventional mortgage costs and rates there are FHA insurance costs that some traditional mortgages don't have but the insurance benefits are well worth the small cost lender closing costs and fees can be fin financed into the loan so little is required out of pocket and depending on the lender there may be credits available to reduce or completely eliminate those costs altogether all right how about nothing will be left for my heirs well your heirs inherit the house just as they would with any other mortgage and in most cases there is equity remaining heirs can decide how to repay the loan balance they can keep the house by paying off the loan they can sell the house pay off the loan and keep any extra funds or they can do nothing with the house and deed it to the lender in no case will they have to repay more than the home's appraised value even if

the loan balance exceeds that value all right and I could eventually get kicked out of my home the heckum or the home equity conversion mortgage reverse Mort AG was created specifically to allow seniors to live in their home for as long as they choose because there are no required monthly mortgage payments to A lender the homeowner can never be evict evicted or foreclosed on for missing a monthly mortgage payment as long as you meet the loan terms you can live there forever regardless of the balance or home value and finally it is completely different than any other mortgage well a reverse mortgage is still just a mortgage in many ways it is like any other mortgage but there are a few big differences okay so let's look at some of the similarities between a heckum and other mortgages okay so let's look at these side by side loans are secured by notes and deeds yes and yes on both of them both the reverse mortgage as well as the forward mortgage or a traditional mortgage

How it differs from a HELOC

and a home equity line of credit or HELOC all right borrower maintains title and ownership lender has a lean against the property yes and yes in both cases how about must have homeowners insurance pay taxes and maintain the property yes and yes so if you don't pay your property taxes you run the risk of losing your home in either of these cases no matter what mortgage you have right how about need to live in the home as a primary residence yes and yes with a little asterisk down here so note that credit line is only available on an adjustable rate heum product all right so there are specific products here that apply to this all right so as you can see a lot of similarities between the two mortgages now what about some of the differences let's take a look at some of the differences between the home equity conversion mortgage and other mortgages first of all required monthly mortgage payment payments no you do not have to make a payment that's the whole idea

behind a reverse mortgage is you don't make any mortgage payments whereas with a home equity line of credit or a traditional mortgage yes you are going to be making monthly payments future credit line availability well yes it's guaranteed and as the value of your home appreciates so does the credit line so if you get a credit line that's let's say 50% % of the value of your home and then the value of the home increases by 10% your credit line actually increases as well and you don't even have to qualify for that increase it just AB it just naturally happens whereas with a HELOC okay that could be cut off I mean I've got I know clients who have had a home equity line of credit but because of the situation or because the home values go down they just get rid of your home equity line of credit or they cut it in half or whatever the case may be but you think you have $100,000 available the next thing you know they completely

take it away from you so that is something to consider it may be cut or suspended by the lender how about foreclosure risk due to non-payment well in a reverse mortgage you know the only issue is is if you don't pay your property taxes or your insurance and a lot of times they'll use a typical like an escro type of an account to help with that they might have you put that money somewhere where it's secure there's a lot of different products that are going to be specific about that but they want to make sure of course that you're pay paying your property taxes and your insurance costs but that's the same on monthly payments tax and insurance you're going to be paying you know those in through a lot of times like an EXT account or you just have to make sure your property taxes and your insurance costs are covered now on a traditional mortgage not only could you you lose your house for not paying your taxes and insurance but you could

also lose your house for not making those monthly payments and it's a lot harder to make a monthly payment in times of uncertainty and difficulty than it is to pay your taxes and insurance so something to consider you're probably more secure in a reverse mortgage situation than in a traditional mortgage situation how about SS can be required to repay more than the home is worth all right think about that if your reverse mortgage or in your if your house was worth a half million dollar and so you get this $250,000 line of credit right reverse loan right a reverse mortgage and then the value of your house drops to Let's say2 200,000 ,000 well now you've got this maybe an outstanding balance of 250,000 your home's only worth 200,000 in a reverse mortgage situation your heirs are not responsible for that $50,000 difference now in a traditional mortgage let's say that your house is worth $200,000 and you owe $250,000 I remember back in 2007 and8 a lot of people owed more than their house

was worth well if your parents die you might be responsible for their difference right or in your case if you have the traditional mortgage your heirs your kids could be responsible for paying the difference on a traditional mortgage but not on a reverse mortgage all right and finally how about the loan balance the loan balance actually increases because you're not making a payment so if you take out a $200,000 you know reverse mortgage and they hand you $200,000 the interest and the payments are going to increase that loan that's going to eat into your Equity right that's how they work but in a traditional mortgage your mortgage actually decreases as you make those principal and interest payments that's obviously one of the big things to consider but that is still the idea of tapping into the equity income tax free and not having to make any payments because the payments and interest just go into the loan itself therefore increasing the loan now now in our next lesson we will show you all of this

Running it through the model

with your personal economic model and we'll use the tanks to kind of visually show you how these reverse mortgages work so if you're still a little unclear on how reverse mortgages work we'll continue this conversation in our next lesson and give you some more visuals to show you a little bit more on how it actually works and then of course our final little note um credit line is only available on these adjustable rate heckum product so there are product specific situations here all right so just some things to think about on the different differences and the similarities with a reverse mortgage or a home equity conversion mortgage and a traditional mortgage okay now in module one we took a look at what we call retirement ready or not and let's take another look it's a little bit different numbers in this case but let's say that we've got A 42-year-old that wants to retire at 65 and live until 84 and let's say they're making $100,000 with $110,000 a year going into savings meaning that

their lifestyle is 90,000 because they're saving 10 and they make 100 so that's their lifestyle they're trying to achieve in retirement let's say that they have a half a million dollars already accumulated at this point and they've been accumulating money at a 6% average return now as they go into retirement they're planning on from these years you know right in here they're planning on going to more of a 5% return a little more conservative right so how is this client going to fair in retirement let's take a look if we click on um the uh if we click on the next button here we can see that they're going to grow their account balance all the way until they retire so by the time they're 64 they're going to have $2.5 million and to try to keep up with that $90,000 lifestyle which of course is now $177,000 because of inflation they're going to try to keep up with that by spending the money that they have saved all right and then that money of

course will eventually if we scroll down here it will eventually be gone by age 80 or 881 now you got to realize this client has a half million dollar though and they're saving about $110,000 a year so not too shabby they're pretty dang close and depending on when they die they might make it if they live until 90 they might not make it right but let's take a look let's go back and look at how your house fits into this situation let's say that we have a half million doll house and we want you know let's say it's paid off because that's the goal everyone wants their house paid off now in this module we've been talking about whether or not paying off your mortgage is the best way to pay off your house you can still have your house paid off and still have a mortgage but let's say that it is paid off there's no mortgage on it and let's say that there's 62 right and they age is 62 and let's say

The monthly payment option

that we're going to do a monthly payment option so one of the things about these reverse mortgages is that there's a few ways to get to the money which we'll go over in the next lesson but there's a few ways to get to the money you can get a lump sum you can get a line of credit or you can have a monthly payment option and on the monthly payment option you can have 10e which basically calculates until your age 100 and then you can have like a fixed number of years so if you just want to guarantee that you're going to have an income for 20 years you could do that as well in this example we're going to leave it at tenure and we're going to just let it run so we have this guaranteed income for as long as we're living in the house it's not like an annuity where you've got a guaranteed income until you die this is a guaranteed income until while while you're living in the house so

if you had to move from your house into an assisted living center or something like that then you would lose that income but if you're always living in your house you're going to get a guaranteed income so let's go ahead and click on calculate and we can find out that we've got an extra 1,00 bucks a month coming in from our house using the reverse mortgage that's pretty powerful so let's actually use those results and then let's go over here into our numbers and without the house on here see that without the house if we scroll down we we found out that we were a little short not too far off because this client has done some good planning but they're a little short so now if we turn on the house that is going to significantly improve our overall situation as we create some extra income let me move that out of the way there we go we're going to create some extra income in retirement now this is not by all means solving

your overall problem there's a lot of other things things that we could be doing we've talked about some solutions up until this point on how to improve your overall retirement and we've got a lot more to cover in this course but this is one step that's getting us closer to improving our overall retirement income by giving us an extra $1,000 a month or more using our home as an asset and an income source during retirement but the best part is is that this $113,000 although it doesn't seem like much is all just B based on this one example maybe your example is going to be completely different maybe you could tap in to a lot more money if you plan accordingly maybe you buy a $2 million house and or you buy a house that you plan on being worth $2 million by the time you retire and maybe you could tap into a million of that $2 million house right and get access to that all income taxfree in retirement just one more way

Rates, programmes and timing

of thinking outside the box of getting taxfree retirement income the thing that's so powerful about this is that it improves everything else it improves that money that's coming out of your qualified plans like your 401k and your IAS it improve improves your Social Security benefits because all of this is income tax free so it does not increase your income it's just a loan it doesn't even register so you've got some additional benefits that comes from that so think about this a little bit outside the box and how to utilize your home in the future as an asset that could potentially give you some retirement income okay so why would you want to do this sooner rather than later now you can't actually do it currently until age 62 but if you are over 62 and you're thinking that this might be a powerful tool but you may not want to use it until you think that you're desperate maybe you just want to consider it as a last resort well there are some reasons you

might want to consider it now which is if interest rates rise you're not going to get access to as much take-home cash cash because interest rates will be higher Therefore your mortgage your reverse mortgage will cost more and you'll have less yourself so interest rates are going to be a big factor interest rates are really low right now in the future they might be higher How about if home prices drop then of course you're not going to have access as to as much money so if the markets are really good right now and your home is worth more than it's ever been worth and you have access now to a big chunk of equity it doesn't matter if the home value drops after you got your reverse mortgage you're locked in if the home value continues to go up your line of credit if you go that route would actually increase with the increased value of your house so not a bad idea to lock it in even if you don't plan on using it

until later right how about if the programs change I know the reverse mortgages have changed a lot because I know when they first came out there were some growing pains and some learning that they had to do but what if the program changes to not be as favorable in the future well of course you would be locked in and you would be able to you know already have qualified you don't have to worry about qualifying in the future what if your credit doesn't allow you to get one in the future they used to not even use credit now they use credit as part of the deciding factor to get a reverse mortgage so things could change but if you get one you would be locked in how about they can't go away once you have it if you get one and you lock it in it's yours to keep and finally credit worthiness could change I mentioned that just a second ago you used to not have to qualify from a credit standpoint now you

do all things to consider as part of getting the reverse mortgage not a bad idea to lock one in then you have it and you can use it in the future all right so we looked at this before yes or no to all of these if you go through these and think about it it might change how you're thinking about your home now as an asset and a retirement Source whereas before you just looked at it as your home and something that obviously we have a lot of emotional connections with but if you take the emotions out of it and if it's you know one of your largest assets then it might be a good idea to utilize it in retirement if it's one of your largest assets also maybe now you're thinking about utilizing it instead of selling it or maybe you sell it and in the next house your final house you consider a reverse mortgage on that one or how about do you ever see yourself needing access to home equity well

Access, and what you leave behind

needing is one thing what about wanting access to it what if you want to have access to the equity because now you've seen some of the tax-free benefits and other benefits of it right that's something to consider also is leaving a paid off house to your heirs a primary objective I'm not saying that you don't want to leave a legacy but what about leaving a legacy some other way where they actually get cash that they could just pay without having to deal with taxes or selling a house or anything like that there are better ways to leave money to your heirs which we'll talk about in the module of leaving a legacy but in this particular case maybe leaving a house is just going to create a lot of emotional you know frustration between siblings maybe one wants to sell one doesn't want to sell there's a lot of stress that comes along with selling a house and giving kids a house as part of their inheritance so maybe you don't want to leave the

house to the kids maybe you want to leave other resources something to consider how about do you see one um how about do you see one of your heirs living in the house for a lot of people once you plan on dying hopefully your kids are already established probably not wanting to move but depending on where you live maybe they do want to live to your home definitely something you want to consider and finally is making mortgage payments during retirement concern if you follow our lessons up until this point we have talked about the benefits of having a mortgage payment or having a 30-year mortgage and the benefit of a 30-year mortgage because it keeps your cash flow under control and you have more money to invest in other things but now what about maybe getting rid of that if you ever needed to through a a reverse mortgage so it's another option another way to look at your house and how you could benefit from it everybody's different everybody's got an emotional connection to

their home this is just one thing to think about