Ep. 10 – Reverse Mortgage: Goal Driven Solution

Brighter Wealth Retirement

Intro about the episode:

Hi everyone and welcome to the Brighter Retirement Radio™ Podcast. In the latest episode of the Brighter Retirement Radio podcast, you’ll hear from guest, Cory Williams, who shares how switching over to a reverse mortgage could offer some financial benefits that you probably didn’t know were possible.

As a CRMP, Certified Reverse Mortgage Professional, Cory explains more about how reverse mortgages are goal-driven solutions. They are a financial planning tool, not a product. Plus, he shares a few scenarios on how to decide if a reverse mortgage is right for you.

 

>>Devin Peterson (00:01):

Devin welcomes us to another episode of Brighter Retirement Radio and introduces Cory Williams to the studio.

>>Devin Peterson (00:00:07):

Devin talks to Cory about when they put together the guest list for the podcast, he was one of the first names that came to mind to be on the show to provide value to listeners. He explains that the purpose of this episode is to discuss goal, a goal driven tool called a Reverse Mortgage or a HECM. He explains that a goal driven financial tool can be extremely, extremely powerful. There are a lot of tools out there, but the best use of a tool in a financial plan is one that has a goal in mind to solve.

>>Cory Williams (01:19):

Cory agrees. He states that a lot of financial planners are gravitating to like reverse mortgages because they talk more to goals and strategies.

>>Devin Peterson (01:47)):

Devin explains that he feels like todays episode can help listeners see a reverse mortgage from a different perspective. He’s going to have Cory pull out some different scenarios that they could relate to and visualize it being a great tool they could use themselves, even if they didn’t fully realize the problem, they had themselves. He asked Cory to give him a broad view, and different strategies on how a reverse mortgage can be use as a financial plan for someone approaching retirement.

>>Cory Williams (02:42):

A few years ago, his company has several financial advisors, loan officers and Cory never allowed them to do reverse mortgages were so simple. They did not fit great for a lot of different scenarios and were just for the one person that was desperate and on the verge of losing their home. He dug into the numbers when his parent’s financial planner knew secrets about it that he had no idea about. It opened a whole new world to him. He quickly found it was a tool that could be utilized even by a person who was a multimillionaire who had multiple properties on free and clear. Why would people want a reverse mortgage when they own their home free and clear? We will discuss that later. We look at people all over the board with their income, retirement, insurance strategy, and 401K’s, this adds one more idea that they can consider regardless of their asset and income level.

>>Devin Peterson (07:21):

Devin asked Cory to explain the experience with his parents and their financial advisor that really made him dig deeper into the value of the reverse mortgage.

>>Cory Williams (7:49):

He and his partner started a large lending company, Cory never personally did mortgages. His dad called him a little panicked in 2008. The market had shifted, and we were not sure what the future would look like. He and his partner never took the time or wanted to understand reverse mortgages. It can be overwhelming because its such an emotional thing. For some people, that is their only asset. When his parents who owned their home free and clear said we need to find additional sources for future income for emergencies let’s do this because our financial advisor suggests it. It took him about 3 or 4 months because nothing is available online to find out all he needed. Removing your mortgage payment can sound like a scam, a lot of people do not want to remove their payment, they just want to be able to know they have cashflow if needed.

>>Cory Williams (10:00):

Cory had to create a lot of different spreadsheets so he and his father count understand how it would affect their estate. Would it help accomplish their goals? There were a lot of big questions, and it was an enlightening experience. When he finally saw how it all worked, a lightbulb went on. He realized there really is something here and there are a lot more people who need to understand what these are. So he decided to create another division of the company.

>>Devin Peterson (11:00):

Devin asked Cory about his Dad and stated that it seemed he also had a very educated background and was into numbers as well. He asked Cory how everything worked out and if his parents ended up doing the reverse mortgage?

>>Cory Williams (11:27):

Cory talks about the unusual circumstance that they never knew a reverse mortgage was for. Before, if you had a current mortgage with a balance and you no longer want a payment, you get a reverse mortgage, you refinance the existing, and now you’ve got to reverse almost the same balances before. But now, you don’t have to make a payment if you don’t want to, so now you’ve got some cashflow. So why do this if you don’t have a mortgage payment. In his parents’ case, they used what’s called the reverse mortgage line of credit feature

>>Cory Williams (12:23):

Essentially, you take the equity of your home and instead of borrowing against the home upfront, you’re putting in place a home equity line, very similar to a traditional one. Doing this gives you the option to draw from it and not make a payment back. So, if someone is retirement age, they really aren’t in a position to pay it back. So, these used to be put in place by financial planners so their clients would have a backup.

>>Cory Williams (13:09):

Cory goes on to explain that another option I where you are still able to draw from a reverse mortgage line of credit or a line of credit, and if you do draw on it, you don’t have to pay it back if they don’t want to. But say the markets crash, what happens then? Typical home equity lines sometimes get frozen by the banks or get reduced. They can do all sorts of things in a reverse mortgage. A reverse mortgage is until you die or sell that home and it increases at a significant rate.

>>Cory Williams (14:01):

Cory give an example of if his parents started out with a $270,000 line of credit. In a reverse mortgage, what seems crazier is that for the, the highest rate that I could have offered them was in their best interest. A line of credit feature in a reverse mortgage grows or increases. Its basically an increase in access to the full equity of the home and increases at the same rate as the rate is on the balance. Since his parents had no balance up front, they own the home. So, if they wanted the highest rate available, they’re able to get them just over 6% when rates were down in the 3’s and 4’s. Now their line of credit at the end of year one, take 6% compounding on a monthly basis and you’ve got a significant amount of money at the end of the year that’s added on to available credit.

>>Cory Williams (15:06):

Cory goes on to explain that not only that, but it’s also nontaxable. He gives another scenario, if someone has $100,000 mortgage balance, but their home is worth $500,000 and we offered them $200,000 line of our loan amount. Their loan total is worth $500,000. FHA says your eligible for $200,000. We have to pay off the existing mortgage of $100,000. What do you do with the $100,000  left after paying mortgage off and what do you do with the $300,000 in value? The $300,000 is just set aside as your equity, its not part of the loan. So, they’re left with a $100,000 line of credit. That $100,000 is going to increase on a compounded monthly rate of whatever your loan rate is.

>>Cory Williams (16:11):

Cory explains, that if that amount is 5%, you’re going to have a little more than $105,000 at the end of year one. If you keep compounding that and it’s not taxed, that’s significant growth of extra cash that you could access from an asset that is otherwise really not an asset when you’re living in it, right?

>>Cory Williams (17:06):

Cory states that that is when he realized, while it sounds great to have your mortgage paid off and be free and clear at that point it’s a safe play. But it still costs you property taxes, insurance, maintenance and all these things. When we began looking at it this way, we realized if we made this into an actual asset that we can use while we are alive not just after we die how would that change things. He says his mother expressed concern, as most mothers do about how they are going to transfer that estate to their children. That’s when he explains, would you rather wait 20 years until you die? Or would you prefer to have access to some of it now and your family benefit from it? That tends to change the mindset. Look at it as a living benefit.

>>Devin Peterson (18:29):

Devin leads into his next question, of how that would affect children and heirs? It doesn’t really change the family’s finances until you’re no longer living. And then, either one of your children will live in the home, or they will sell it and disperse it several ways. Does this make it to where there are several different ways on how this asset can be used now? Both living, and after you pass?

>>Cory Williams (19:31):

Cory goes in to break this up into a couple examples. Say they have $300,000 or so in their line of credit and it’s available. He had a family member who couldn’t afford rent, and his parents would shell out money here and there and we always discussed, wouldn’t it be nice if we controlled that home that she lived in and controlled the rent?

>>Cory Williams (20:33):

Cory went on to tell his dad, hey, the home she’s living in is actually for sale for $190,000. It’s not listed but the landlord has always said that. You could offer $190,000, why don’t we take some of that line of credit, and purchase that home? Then that’s debt. But, it’s also an offsetting asset that is increasing in value because it’s real estate. It’s also cash flow, because you receive rent. If she has to leave to home, you can continue to rent or you can sell it for however much its increased in value gain. If she needs that forgiven rent payment, instead of pulling it out of another source of retirement, you can say okay, let’s pull this out early from the children’s estate and advance it to her in a way.

>>Cory Williams (21:31):

Essentially, you’re advancing you children another asset out of their current asset. It is increasing in value and it is getting an offsetting payment to keep the interest paid down. Rent can be increased so you can get more cashflow. If his parents had died, the children now own their parents’ home. It could already be paid off again with the line of credit they borrowed from to buy the other home. Now the children could have two properties they could rent. Something that very few would connect with a reverse mortgage. While they didn’t end up needing to do that, but that’s the general idea.

>>Devin Peterson (22:17):

Devin points out a couple bigger points in this example. 1, as a parent, its nice when you can grow your inheritable estate for your children. Although the downside, is that it often comes many years down the road. With a reverse mortgage, you can provide support to your children when they may need it most due to struggling to pay rent, a down payment for a mortgage when they are younger, exc. Instead of when your child is 40 or 50 years old and the hardest times of their life are behind them.

>>Cory Williams (23:49):

Cory says another way to think about this, his dad actually had to draw about $20,000 not too long after the start of that and it was to buy a vehicle that they really needed. Actually, it was for their granddaughter. They were trying to help her get ahead and bought it for her. They were going to pay that pack, so they have this $20,000 loan balance, and his dad was getting growth of about 6% tax free on the line of credit, but he’s also paying 6% or so on the actual balance. Cory happened to have $20,000 sitting in a money market account that was getting very little percent back.

>>Cory Williams (24:51):

Cory told his dad, “why don’t I take that $20,000 out of my own account? I’ll pay down your mortgage balance effectively, we’ve just paid down the family’s estate that was accruing interest on that $20,000 at 6%. Now that $20,000 is growing at 6% instead of 1%. That makes a big savings and a win for Cory. It can be very confusing, but visually seeing it helps.

>>Devin Peterson (25:46):

Devin states that that is why he is here, those goal-driven scenarios can be so powerful. He asks Cory to talk more about the living benefit concept and put it into the future. When your parents are aged and close to passing away, you have this growing asset and equity. But you also have this growing equity line. Is there potential of when your parents are close to passing away that the equity line would be greater than the actual value of the house, if so, what do you do?

>>Cory Williams (26:38):

Cory says its not easy for that to happen since FHA changed their lending laws a couple years ago. His parents’ home is in a retirement type area, so it has never really increased in value. They had an upfront discussion with the family that states, once his parents pass, the line of credit is just voided. Like a credit card. So, we can only still now get as the heirs. Whatever that value of the home, minus the payoff of the loan.

>>Cory Williams (27:42):

With his parents’ case, the payoff would be zero. The home may have accumulated or appreciated to $700,000 so they sell it, they get that money minus fees to realtors and split it. They could foresee that it was possible for their line of credit to be over $800,000 that year so they say what do we do when we get there and mom is alone at home and wants to live with somebody and that home is too big for her. She needs to move to assisted living, that is still her money and they want to make sure she gets the most value out of the state while still getting to the end of her life comfortably. They thought, at that point, they could sell the home if that line of credit wasn’t great and get the equity out and put it in their trust.

>>Cory Williams (28:43):

Cory says they utilize it for their benefit, until they pass away and then its dispersed just like it would in a normal circumstance. If that line of credit would exceed it though, yes, they can pull that all out. These loans are non-recourse, which means, even if the home balance or the mortgage balance is higher than its value, those parents can walk out of there. They could pull that $800,000 line of credit, stick it in the trust or some different investment, whatever they want. Hand the keys to the lender and say thanks for the benefit. The homes were $700,000 but now there is an $800,000 balance. The family came out way ahead than going through trying to sell the home and liquidate everything.

>>Devin Peterson (29:34):

It appears there is a lot of flexibility in a reverse mortgage. What are the risks that individuals are taking when they open a reverse mortgage? Where there expenses? What can they expect ahead of time?

>>Cory Williams (30:30):

Cory wants to focus on two things here. One is the risk, the second is the cost. The risks are the same as a traditional mortgage, even if you don’t have any mortgage payments and its paid off. There are four requirements. If you don’t follow them, you’re at risk for default. One, pay property taxes. If you’re unable to do that, you can lose your home. That’s where reverse mortgages got the reputation they did, because where they were saving them a mortgage payment, they still weren’t able to pay their property taxes.

>>Cory Williams (32:32):

Cory continues, the four things are, pay your property taxes, pay your homeowners insurance, occupy the home as your primary residence, and maintain the property. If you can do those four things, you’re in the clear. Now to the costs, what is the goal?

>>Cory Williams (33:29):

The cost is sometimes peace of mind, it may not be huge financial gain. It tends to be more about peace of mind though. The cost can be a little bit high from the perspective of anybody seeing these for the first time with the biggest one is the upfront mortgage insurance premium FHA requires, its 2% of whatever the value they use on your home. So, if your home is $400,000, $8000 that comes right off the top, is that a big hit?

>>Cory Williams (34:28):

If it was a regular mortgage, yes. What are the other costs? Your lender could charge an origination fee, appraisal fees, title fees, everything is the same as a traditional mortgage. Sometimes lenders can help pay those, but they always must pay that up front.

>>Devin Peterson (36:00):

So, from a child role, while it may look like $15,000 less is coming out of inheritance of the whole family, that money now allows his mother to have quality of life for the next 20 years. He can have peace of mind that she is living withing her means and can be a good grandmother and mother. There is a lot of value in that.

>>Cory Williams (37:08):

There are circumstances where Cory encourages people not to do a reverse mortgage. After he goes over everything with clients, he asks about how long they intend to live in this home. Some want to live and die in their home, but others eventually want to downsize into something smaller. At that point, they must discuss what the result will be. What the net effect to rollover, and their equity into the next home if they do use reverse mortgage.

>>Cory Williams (38:03):

Cory gives another example, where there was a couple and they knew he was going to die within a year. He was afraid they were being pushed into this before he passed. His wife was the mathematician behind it though, she wanted protection and to make sure she could stay in the home. But she knew upfront she intended to sell this home and move within 3 years. Initially it was concerning, not knowing if they really wanted to take that chunk of money. But after cashflow analysis with her and her advisor it became clear that nobody knew if something would happen with her health in the next three years and she may need access to that cash. So, in the long run, that extra level of certainty would protect her against any health concerns on her end.

>>Cory Williams (39:23):

Cory tries to invite adult children to be a part of the conversation when it comes to reverse mortgages, but some parents don’t want them involved out of fear that they will only be concerned about trying to protect the interest of the assets they will inherit when parents pass. However, there is a big shift in attitude about getting an estate, most would rather have money available to take care of their parents instead of having to try and pull from their own. It takes a large burden off the children’s shoulders.

>>Devin Peterson (40:40):

Devin says he always thought of using this goal-driven tool to accomplish something for those that you are getting the mortgage for. But it has a big positive emotional effect into future generations when they see and understand why parents are doing this to try and help take some financial burden off their shoulders.

>>Cory Williams (42:38):

Cory had a call with a client of a different financial planner. This man retires in four months and he is switching from always moving upward, to suddenly not knowing what to do or think and now being worried about any money you spend. They spent their whole lives working up to this point now to panic. A reverse mortgage can give you a little bit of freedom or permission to still have fun in your retirement. You have got this asset, it does nothing for you without the instrument of reverse mortgage.

>>Devin Peterson (43:33):

Devin states that its like a sequence of returns. It is a hard asset that is linked to your primary residence.

>>Cory Williams (44:12):

The idea of it is to make sure you are drawing when the returns are at their greatest.

>>Devin Peterson (44:56):

Devin explains that it comes back to the bucket approach. Where you have separate buckets that behave differently. You don’t want to be pulling from something declining in value when it’s your only bucket. It makes it more of a double loss and you are permanently locking in all those losses with those shares that you now have to sell at that low price. So, there is value in having another asset, like a reverse mortgage, or sometimes in the CD or a fixed index annuity, that is not declining in value like some other assets.

>>Devin Peterson (46:04):

If you use that asset that isn’t declining in value to fill that part of the market that is down, you can maintain your market and equity value over the long run because you didn’t lock in any negative losses. The real risk that retirees have can be offset by this equity line inside of a reverse mortgage. You don’t have to use it, it can sit there and continue to grow. It allows you flexibility in future years where the market may decline.

>>Devin Peterson (47:08):

Devin gives some different scenarios to have Cory respond to on how retirees could use a reverse mortgage as a goal driven tool.

>>Devin Peterson (48:01):

Here is a scenario, there’s a client that wants to retire but still has 15 years on their mortgage. They know they can’t retire until the mortgage is paid off because that monthly payment is just too much. He asks Cory how he would approach that?

>>Cory Williams (48:30):

Cory says that scenario comes up frequently. A lot of people want to feel like they meet their obligations of any debt they have. Where he may advertise hey let’s get rid of your mortgage payment, but people are still concerned about the future payment and don’t want to feel like they aren’t meeting the obligations of the loan. So, Cory asks at that point if they are still making income?

>>Cory Williams (49:32):

So why look into a reverse mortgage now if you’re of age? A reverse mortgage is simply just a traditional mortgage on steroids. It’s the exact same concept. There’s now a lien on your property, and you have a choice. You can make a payment, or not make a payment. Make a smaller payment, or a larger one. The huge benefit is once it is set up, every dollar you pay into the mortgage is an offsetting line of credit dollar. If you continue to pay the mortgage down on the traditional mortgage, that’s great. You do still have to qualify on income and credit though. Say you make a $2000 dollar payment to your mortgage; you’re getting $2,000 each month in addition line of credit. If three years in you’ve paid your loan down. Now you’ve got potentially $72,000, plus growth at 4% or whatever your rate was compounding tax free.

>>Devin Peterson (51:53):

So, this family that wants to retire but still has 15 years left to pay. If they do reverse mortgage they can choose to pay and continue to work. How does it work inside of a reverse mortgage if they just want to stop paying their mortgage and they still have a balance?

>>Cory Williams (52:15):

The same thing, you just quit making the payment. It’s non-recourse. The loan balance will just start to increase. It’s negatively amortizing.

>>Devin Peterson (53:47):

It comes back to your ability and desire to look at numbers and make economic decisions. Some people may not have that perspective, but it’s a tool they should discuss with their financial advisors and see if it could improve retirement situations.

>>Cory Williams (54:26):

Yes. The takeaway for anybody would be, no matter what you think and know. In almost every circumstance you can find a silver lining across the portfolio strategy. Its comforting that there are ways to solve problems that you can’t necessarily foresee today. It’s nice to know its there even if you don’t do it.

>>Devin Peterson (55:42):

Devin asks Cory where he would recommend listeners go to research and educate themselves more on reverse mortgages?

>>Cory Williams (56:16):

Cory recommends the best, and most unbiased place would probably be reversemortgage.org. It’s an association in DC. You can look up CRMP which are Certified Reverse Mortgage Professionals. It’s a difficult certification. It just means we have agreed to adhere to an extremely high standard of ethics and that’s where he would send people first.

>>Devin Peterson (57:17):

Devin suggests that the biggest take away today be starting a conversation. When you have your annual review with your financial advisor, ask your advisor if they’re familiar with it. If it can fit into your retirement finances.

>>Devin Peterson (58:14):

Start the conversation, worst case scenario you find it’s not a good fit for you. Best case scenario, you may find a silver lining or even a gold lining that could significantly fill a space in your retirement plan that you didn’t realize you could have.

>>Devin Peterson (58:36):

Devin thanks Cory for sharing his insights. He asks Cory, “What makes you feel alive and relevant in your life?”

>>Cory Williams (58:54):

Cory says he loves anytime there’s powder on the slopes and glass on the lake. He sometimes gets a little panicky about making sure he is prepared for retirement, but its so nice sitting down with couples and discussing this and seeing a huge burden lift that they didn’t really realize was there until they no longer feel the weight of it.

>>Devin Peterson (1:00:09):

Devin tells Cory that the understanding he provides with some of this information is truly relevant. He is adding a level of peace of mind where he is showing up and providing this wisdom and education where he is really clearing up uncertainties about reverse mortgages.