In this episode of Reverse Mortgage Radio, Bruce Simmons delves into the complexities of negative amortization and its impact on homeowners with reverse mortgages. Bruce breaks down the concept with practical examples, highlighting how reverse mortgages can offer financial flexibility without the immediate burden of loan repayments. He also addresses common misconceptions about reverse mortgages, ensuring listeners have a clear understanding of how these financial tools operate.
Welcome to Reverse Mortgage Radio, hosted by Legend’s very own reverse mortgage professor, Bruce Simmons. You have so many options with a reverse mortgage, everyone has a different opinion, and the government keeps changing the rules. You need to hear from the first certified reverse mortgage professional in Colorado to specialize exclusively in reverse mortgages, one of few in the state with the letter CRMP after his name. Bruce has the specific training and education you need to understand what you’re buying. Now, here’s your host, Bruce Simmons.
SPEAKER 02 :
Hello and welcome to another episode of Reverse Mortgage Radio. Very glad you can join me today. We’re gonna be talking about Negative amortization. I know that’s one of those silver dollar words like my grandpa used to say, but it’s important with reverse mortgages that you understand how they work. And so today on today’s show, we’re going to talk about what it is, what is reverse or negative amortization and how it affects you if you have a reverse mortgage. However, first, I do need to kind of tell you a quick story because I was kind of in a panic last week. I ran to the doctor really quick and I was in a panic and I told the doctor, I said, doctor, I had this strangest feeling like I was shrinking. And the doctor calmed me down and he said, just take it easy. And then he looked at me and he said, Bruce, you’re just going to have to learn to be a little patient. So that’s how I start off my show today. Gives you a little bit of an idea what you might be in for anyway. If you have any questions, not criticisms of my dad jokes, but actual questions about reverse mortgages, or you have some input about reverse mortgages, feel free to give me a call. My direct line is 303-467-7821. My name is Bruce Simmons. I’m the Reverse Mortgage Manager for American Liberty Mortgage in Denver. 303-467-7821 is my direct line. You can also visit me online at ReverseMortgageRadio.net. ReverseMortgageRadio.net is my website. And you can go there, download my free consumer guide. Totally free. Just download it. It’s got a ton of information. I believe I also have information in there about negative amortization. But you can also get a free quote. And this is a true free quote. It’s not putting your information in and waiting for me to call you back. You put some information in. We do not ask for a social security number. It’s like your name, your address, your value, how much you owe on the house, your age. And then it’ll give you an idea of how much money you could get from a reverse mortgage. It’s not 100% perfect. It’s usually a little lower than what you actually can get because I need to be conservative in that. I’d rather under-promise and over-deliver. You know what I mean? So it might say you qualify for $150,000 when… When I do the numbers myself, I might come back and say $160,000 or $170,000, depending on the numbers and what was put in and things of that nature. Also, too, a lot of people don’t know the actual value of your home. I get a lot of people who tell me a value, and then I do some research online, and it looks to me like it might be higher or lower sometimes, too, than what you think. So I do that for you if you call me and want a quote directly. I’ll get your address and I’ll plug in some information online and do my own research. I’ll ask you some information about your home, if your basement’s refinished and what kind of improvements you’ve made, things of that nature. It just gives us a little bit tighter picture of what you might qualify for. So please feel free to visit my website at reversemortgageradio.net or just give me a call. But today we’re going to be talking about negative amortization. The reason I chose this topic for today is I was looking over the website performance over the last number of months, and it seemed like the phrase, what is negative amortization, Far outpaced any other phrase that led people to my website. I mean, by like four or five, six times the amount that the other keywords ended up directing people to my website on. So I figured I should do a radio show on it. And then also, too, I probably should do a video. I haven’t done videos in a long time. I probably should do a video on negative amortization and how it impacts reverse mortgages because we’re going to be talking some numbers today. I’m going to get a little bit in the weeds, not too much hopefully, but we’re going to get into some examples and I’m going to be talking about some numbers. Things like that are just easier when you can actually see the numbers that I’m talking about. That’s why I’m thinking this would be better suited for a video, but I want to get the information out to you. First of all, what is negative amortization? Negative amortization is where you’re not paying enough on your mortgage loan. payment to cover the interest that’s charged. So your loan balance actually gets larger. Let’s say you’ve got a $1,200 interest payment on your mortgage, but you only pay $1,000. Well, you ended up owing $200 more than you did before because you didn’t pay enough to cover the interest. Well, with reverse mortgages, you don’t have to pay any interest at all. You’re charged interest, but you’re not actually required to pay it. Let’s talk about what a reverse mortgage is real quick because I feel like I should explain that first. Most of the time, a reverse mortgage is an FHA insured loan. An FHA is the Federal Housing Administration. It’s a government insured loan. It’s not a loan from the government. It’s a loan that the government insures. It’s from private companies, but the government guarantees certain aspects of it. So the way a reverse mortgage works is it’s an FHA-insured loan, and it allows you to access a portion of the value of your home. that you can take out and you never, ever, ever have to repay it as long as you live in the home. However, you’re still charged interest every month, interest and mortgage insurance, in fact, because all FHA loans require mortgage insurance. That’s how they provide the guarantees, the insurance on it is you pay for it. Well, with reverse mortgages, you don’t actually pay anything. You’re charged for it. You don’t pay it until you sell the home. So anyways, the reverse mortgage, you’re charged interest and mortgage insurance every month, but you’re not required to pay it. Since you’re not making any payments, that interest and mortgage insurance get added to the loan balance because they’re still charged, but it’s not paid for. So it gets added to the loan balance. If you took out a reverse mortgage for $100,000 and you kept it for one month and then paid it off, you would end up owing like $100,500 or $100,600 or something like that. Because the interest that you did not pay got added to the loan balance. And so your loan balance went larger over time. That’s kind of the way reverse mortgages work. Now, as long as you live in the home as your primary residence, you or your spouse, if you’re married, live in the home as your primary residence, you pay your property taxes and your homeowner’s insurance because the home stays in your name. It’s still your house. The bank does not take ownership of the house. I think for the most part, most people understand that now, but there’s still a lot of people who think the bank is going to take your home when you leave. pass away. And that is not the case at all either. Your heirs inherit the home. But you have to live there as your primary residence, pay the property taxes, pay the homeowner’s insurance, maintain the home, and keep your name on title to the house. As long as you do those five things, you are never, ever, ever required to make a payment and nobody can ever come back to you and tell you you need to get out of the house let’s say you use up all the equity in the in the house they can never kick you out that’s part of the guarantee that fha offers because this mortgage insurance is in place they guarantee that you can never leave a debt beyond the value of your home to your estate or your heirs if you had to leave your home let’s say 20 years down the road but your home value dropped and now your home, let’s say, is only worth $200,000, but you owe $300,000 on the reverse mortgage. You can never be kicked out of the house, but what happens is there’s no equity left. If you had a regular mortgage and that situation happened, you would still be responsible to pay the full $300,000 that’s owed. With a reverse mortgage, you are not. You can simply sign the home over to the lender and walk away. It’s that simple. Or if your heirs wanted to keep the home, they could pay 95% of the current value. They would pay 95% of the $200,000 value on the home, even though 300 is owed, and they could keep the house. And that’s a different topic, really, for what happens at the end of the loan. But there’s protections. Just keep that in mind. There are protections with a reverse mortgage. The guarantees from FHA that you never can leave a debt beyond the value of the home. That’s very important. Because this is a negative amortized loan, meaning that the loan balance does get larger over time. One way that I like to think about negative amortization on a home with a reverse mortgage. It’s like, even if, let’s say there’s an appreciating market, because that’s what a lot of people think. They say the loan will chew up all your equity. Well, it’s unlikely because we don’t loan a high percentage of the value. We don’t loan 70 or 80 or 90% of the value. We typically loan 30, 40%, maybe 50%. If you’re like in your mid 80s, you can get close to 50% of the value. And that changes based on interest rate. If the interest rate drops, then we can loan more. If the interest rate goes up, then we loan less. That’s just the way it works. But if you think of a negative amortization on a home with a reverse mortgage, even in an appreciating market, is like filling a bucket with a slow leak while the water is also being poured in. Just imagine your home is the bucket, okay? And the water being added represents the increase in your home’s value as it appreciates. However, when you have a reverse mortgage, the loan balance is growing over time because of the accrued interest and fees. This is the leak. So there’s a leak in the bucket. And odds are, the water being poured in, the appreciation, is growing faster than the leak. But if the appreciation isn’t fast enough to outpace the growing loan balance, the leak, then your equity will shrink despite the rising value of your home. And over time, even in a market where home prices are going up, you could, it’s very rare, but you could still end up with little or no equity left in a reverse mortgage and as the balance grows faster and faster. And if it’s growing faster, then the home’s appreciating. And it takes a long time for that to happen, but it’s possible. I always tell people it’s possible. You have to be okay with the fact that your loan balance is increasing over time. If you’re not, you should not do a reverse mortgage because every month you’re going to get a statement in the mail. you’re gonna see that loan balance getting bigger and bigger and bigger. What I tell all my customers is that if looking at that statement and seeing that loan balance get bigger and bigger and bigger is gonna cause you more stress than the benefits of the loan that you get, then the benefits you get from the loan, excuse me, then you shouldn’t do the loan at all. It’s not for you. But what you can do is change the gears a little bit in the way your mind thinks about it. And we’re going to go over a couple of examples here in a minute. How… reverse mortgage still works and the money you’re saving if you’re paying off an existing mortgage and things of that nature. But in the meantime, you are listening to Reverse Mortgage Radio. My name is Bruce Simmons. I’m the reverse mortgage manager with American Liberty Mortgage right here in good old Denver, Colorado. You can reach me directly at 303-467-7821. That’s my direct line. It rings right to me. Actually, it’s forwarded to my cell phone. That’s a landline. Don’t text me at that line, but it’ll be forwarded to my cell phone, 303-467-7821. You can also visit me online at reversemortgageradio.net. You can apply or get a free quote online. You can actually even apply. You can fill out some additional information after you get your quote. That all comes to me. Then I’ll reach out to you to fill in the gaps and make sure that that we’re on the same page. And typically what I do is I’ll schedule a time to meet with you where I come out to your home and go over the numbers with you so you can have a good visual of how the numbers look and you can see how a reverse mortgage would affect you. And then you can make a decision if you want to proceed. But even then, let’s say you say, yeah, I want to sign right now. I’d say, no, you’re not allowed to. You can’t. I won’t bring paper for you to sign when we meet. All you’re doing is gathering information because then you have to talk to a reverse mortgage housing counselor. before you can sign any paper because the counselor wants to make sure you understand it as well. And it’s good because you hear it from a different person. I explain things a certain way, the way that I think makes the most sense. Maybe that doesn’t make the most sense for you, the way you hear it. You might hear it differently. You might see things differently. And so when this counselor is talking to you and it’s all done over the phone, they might explain stuff a little different and clarify it for you. So it’s a little better. Sometimes, unfortunately, it happens. They confuse you more. But most of the time, it’s a good thing, believe it or not. All right. So feel free to visit me online at reversemortgageradio.net or call me directly at 303-467-7821. Now what I want to do is I want to go through a couple of examples. One is where you have a $600,000 home, you’re 62 years old, and you own the home free and clear. That would be awesome. If that’s the case, you’re in great position because you’ve got a ton of flexibility with the reverse mortgage. But what a lot of people do, because there’s different ways you can take money out from a reverse mortgage. You can receive a monthly payment. That’s what a lot of people say where the bank pays you instead of you paying the bank. That’s one option. Another option is taking a lump sum. Now, there’s restrictions with that. You can’t take all the money in one lump sum. But you can take 60% of it that’s available in one lump sum. And then the rest would be available to you a year later. You can also set up a line of credit. So you leave all that money in a line of credit for emergency purposes down the road. Or what most of the time happens is a combination where you take out $100,000 to pay off an existing mortgage, and then you take out $20,000 to do some home repairs, and then you’ve got $50,000 or $60,000 or $80,000 or whatever in the line of credit that’s still available to you. It just depends on your specific situation. But for this person, for this scenario, I’m showing somebody who has a $600,000 home. They own it free and clear. They’re 62 years old. They take all the money from the loan balance. And after closing costs and everything, they end up with $169,000. That’s the amount of money that’s available to this 62-year-old. They keep it for 23 years until they’re 85. And this is one of the key, key benefits with reverse mortgages. If you have the ability to leave money in a line of credit, I highly recommend it. If you’re talking to somebody about a reverse mortgage and they’re trying to tell you you should take as much money as possible out up front in one lump sum, hang up. you don’t need it. I mean, well, you might need it if you have a bunch of debt and you really want to pay it all off or whatever. You take as much money as possible. I’ve done those like that for people sometimes. Most of the time, they don’t need the money right away. And in that situation, you don’t want to take it because then you’re charged interest on whatever you take out. But you’re only charged interest on what you take out. If you leave it in a line of credit, you’re not charged interest on it. In fact… That line of credit grows over time. It grows at the rate of a half a percent greater than the interest rate you’re charged on the loan balance. Let’s say your loan balance in this scenario or your interest rate you’re charged on the loan balance is 6.375. That’s what the rate would be today, 6.375. That means your line of credit is growing a half a percent greater than that. The line of credit is growing at $6.875. You start off with $169,116. That’s what’s available in the line of credit after closing costs. And we finance the closing costs. Those are rolled into the loan. But now you keep that money just for emergencies. But luckily, no emergencies happen in the next 23 years. Now, 85, you need to start drawing some money out to help out with in-home care. You want to stay in your home, and it’s a challenge. Or maybe you need to improve your home to make it safe for you to be able to stay in. That line of credit that started out at $169,000 has grown to almost $917,500 today. That’s, I’ve got the numbers right here. I’m looking at it. Believe it or not, if you want, I can send you the numbers on this scenario just so you could see. $917,000 when you’re 85 years old. Would that come in handy? I would think so. I mean, I hope I have something like that when I’m 85. You know, that would be a nice little, and that’s regardless of the value of your home. Your home could go down in value. You could owe, your home might be worth 300,000. that $900,000 is still available to you. That’s because the mortgage insurance that you’re charged by FHA. It guarantees it. So the lender is never going to lose any money. So they’re never going to come after you, your estate, or your heirs if there’s a loss. The mortgage insurance will cover it. Now, let’s think about the value. Value at $600,000 in 23 years using the same appreciation, right? Basically, it’s 4% per year, 4% appreciation per year on average. Now, it might be negative one year and 10% the next year. We saw that in 2009, 10, 11, 12, and then, you know, 2013, 14, 15, it started growing like crazy. In 19, or excuse me, in 2002, The average home value in Denver, Colorado, was $220,000. Today, the average home value in Denver is $550,000. I’ve heard up to $750,000. I don’t know… I checked online and the online stuff said 550, although I’ve seen reports from industry professionals that said 750. Even using the conservative value, 550 is the average value now. That’s two and a half times the value it was 23 years ago. So if we take the $600,000 value and multiply it times 2.5 times, that’s $1.5 million that your home would be worth in 23 years. And basically, that’s exactly the numbers that come out on this computer model that we have with 4% appreciation. So your house value would be worth about $1.5 million. And that means that you could sell your home anytime too. You could sell your home and walk away from it and you just pay off the loan balance. You don’t have to pay off that line of credit because you never used it, right? But then you could tap into all that money to stay in your home if you wanted to. That’s a pretty incredible thing. The line of credit, even though the equity grew two and a half times, the line of credit grew like five and a half times because it’s tied to the interest you’re charged on the loan. Now, obviously, if the interest went down to 3% and the growth rate on the line of credit’s only three and a half, that’s a different story. You’re not going to have as much money. If the interest rate goes up and now it’s 8% and your line of credit’s growing at eight and a half, then it’s going to be a lot higher even. You’ll have over a million dollars, well over a million dollars. So it just depends, and it changes. The interest rate on these loans can change monthly. Now, let’s say you own your home, but you have a mortgage on it. Let’s say that $169,000 you qualify for, all of it has to be paid towards the mortgage. And I did the numbers on this. If you took out a $180,000 mortgage in January of 2012, January of 2022 at 3.5% for 30 years. All right, and that’s 3.5%. A lot of people say, I really hate to get rid of this 3.5% mortgage. And I say, hey, you can keep that 3.5% mortgage along with that $1,322 payment because that’s how much the interest in principal payment is on an $180,000 balance. But now, four years later, or three years later, because you have 22, 23, and 24, we’re early 25 now, The loan balance has been lowered to $169,000. So you’re using all the money from the reverse mortgage. You’re taking it all out. There’s no line of credit available. But you’re saving $1,322 a month. And if you kept that loan for 23 years, remember that mortgage was originally a 30-year loan, so that was going to last you until you started at 62 until you’re 92. I’m counting until you’re only 85. So at 85, you would have saved. Over 23 years, you would have saved $365,000. That’s extra money in your pocket. $1,322 every single month in your pocket that you’d keep. Now, your loan balance would grow up to a million dollars. $1,031,000, almost $1,032,000 is what you’d owe on that loan. But you saved yourself $364,000 in out-of-pocket expenses. And what could you have done with that money over that time period? Just answer that. Yeah, you say, holy cow, I owe a million dollars. That’s unbelievable. Well, remember, the value of your home very likely could be a million and a half. $1,500,000. So you still have $500,000 in equity. You started out with less equity than that because you had a $600,000 home with $169,000 mortgage on it. So you only had, what, $421,000 or whatever, $431,000 in equity. But now… 23 years later, you have $500,000 in equity and you didn’t make a mortgage payment for 23 years. Is that a sweet deal? I think it is. That’s my plan. Well, my goal is to get a reverse mortgage to buy a home and overfund that loan so I end up with a line of credit. It won’t be the full amount, but it’ll be a line of credit. And I just think that if you look at the negative amortization in the proper light, yeah, your loan balance is growing over time. There’s no way around it because you’re not making payments. You’re keeping that money in your pocket. Something has to happen to the interest you’re charged. Interest is charged on everything, every loan you’ve ever had. And a lot of people will tell me, they’ll say, why should I have to pay interest on money that’s mine anyway? Well, it’s not your money. You’re taking money, you’re taking a loan against your house, but you’re borrowing somebody else’s money. They’re just using your house as collateral. Remember that. It doesn’t matter if you take out money on a credit card or a house loan, a HELOC, refinance on a regular mortgage with cash out. You’re borrowing money and you’re charged interest. The only question here is whether you pay it because with a reverse mortgage, you don’t got to pay it. That’s what I really love about this loan. Now, you can make payments. Let’s say that you’re a commission real estate agent and business is slow right now and you’re trying to slow down anyway because you’re 62 years old. You’re thinking you’re going to retire here in the next few years. Well, Imagine you have no sales this year, or maybe one sale, so you have a little money in savings. That doesn’t help you. But then next year, interest rates come down, the housing market booms, and you have 10 closings next year, and you make $30,000 or something on whatever. You’re at $30,000 on a sale, and you’ve got this extra money. You can apply it towards your loan, and that would be credited towards your line of credit. It’ll lower your loan balance so you’re charged less interest, and it’ll increase your line of credit so your line of credit will grow at a faster pace, and you’ll have more money available to you down the road. That’s what I plan to do because I’m going to get a reverse mortgage when I sell my home here in the next few years, and then I’m still going to continue to work even with a reverse mortgage, and I’m going to plan on making payments on this reverse mortgage that I get. to increase my line of credit so that I have more money available later in life when I might need it for health reasons or for travel, whatever the case may be. I want to be able to live a comfortable, enjoyable retirement. And that’s the goal with a reverse mortgage. So if you have any questions about how reverse mortgages work or negative amortization, I’d love to explain it to you. I can do these numbers for your specific situation. Please call me. You can reach me directly at 303- 467-7821. My name is Bruce Simmons. I’m the reverse mortgage manager with American Liberty Mortgage here in Denver. Bruce Simmons, 303-467-7821. You can also visit me online at reversemortgageradio.net, reversemortgageradio.net. Download my consumer guide, get a free quote. Look at the videos, the testimonials that I’ve got online as well. I’ve got a ton of great information there. Please feel free to visit me online or call me. However you want to reach out to me, I’d love to talk with you. Thanks so much for listening today. I hope you have a fantastic day.
SPEAKER 01 :
Call Bruce Simmons today. Ask about his free Colorado Consumer Guide, 303-467-7821 or reversemortgageradio.net. Bruce will come to you anywhere across the front range to make sure you understand how reverse mortgages work. Regulated by DORA, NMLS number 409914. American Liberty Mortgage is an equal housing lender.
