Bruce offers an in-depth perspective on reverse mortgage options, discussing the various ways homeowners can access their equity, whether through a lump sum, monthly draws, or a line of credit. Understanding the implications and responsibilities of holding a reverse mortgage, including maintaining homeownership and ongoing costs, is crucial for anyone considering this option. Listen in to learn how to strategically use this financial product to meet your retirement or financial planning goals.
If you’ve done any research at all on reverse mortgages, even if you’ve just watched a couple of videos or read a couple of articles, you’ve either heard or read the quote, reverse mortgages are expensive. Are they really? Compared to what? I mean, you have to have something to compare it to, right? Look at Denver. Denver is expensive. We all know that, right? Well, compared to what? Compared to the Bay Area? I don’t know. Compared to Seattle? Austin, Texas? What about Lincoln, Nebraska? Or Syracuse, New York? Is Denver really expensive compared to other major metropolitan areas? I don’t know. I haven’t done all the research, but my gut kind of tells me we’re probably in the ballpark. Every place has become more expensive. Well, everything has with all the inflation we’ve seen over the last few years. But is a reverse mortgage really that expensive? We have to compare it to something, right? Is it a mortgage? Do we compare it to a mortgage or another financial product like insurance or annuities? Or is it a HELOC? We’re going to get into the weeds on all these questions, but I’m jumping way ahead of myself right now because We also need to talk about what a reverse mortgage is before I can get into all the details about the cost. And I will, I promise. We’re going to go line by line through this. But we also need to talk about what it is that you’re wanting to accomplish with a reverse mortgage. What problem are you hoping to solve with a reverse mortgage? Thanks so much for joining me today. I keep jumping ahead of myself. You are listening to Reverse Mortgage Radio. My name is Bruce Simmons. I’m the Reverse Mortgage Manager with American Liberty Mortgage here in Denver. And I’ve been specializing exclusively in reverse mortgages since 2003. I’ve worked for American Liberty Mortgage now since 2011. I love what I do. I love working with people and explaining this program to them and showing them how it can benefit them and all this stuff. And it’s just a fantastic product. It’s the only loan that I do. And it’s the only loan I’ll ever do. If something happened where reverse mortgages cease to exist, I would not sell other loans at all. I would get out of the lending business completely because this is the only loan that I’ve ever really been this attached to. I think it’s a fantastic product. I plan to get one when I’m old enough and in the right home and all that stuff too. But you can reach me with any questions about reverse mortgages at 303- 303-467-7821. 303-467-7821. That’s my direct line. I’ve got it forwarded to a cell phone. That’s a landline, and it’s forwarded to my cell phone. So don’t text me at that number. You can call me, and then once we talk, I’ll give you my cell number. You can also visit me online at ReverseMortgageRadio.net. ReverseMortgageRadio.net. If you miss any of this show, you can go there next week and download the podcast. We also have podcasts on other platforms as well. I’m not sure where, I don’t know. My web guy handles all that for me. But let’s talk about what a reverse mortgage is, okay? First of all, a reverse mortgage is most of the time an FHA insured loan that is specifically designed for people that are 62 and over. And also too, when I say it’s an FHA insured loan, that does not mean it is a loan from the government. A number of people, don’t hear that correctly. They hear FHA and they think it’s a government loan. FHA is government insured. So that means the government basically backs up the loan. If something were to happen and you had a bunch of money in a line of credit, the government takes care of that. They make sure that that money is going to be available to you. Let’s keep that defined there. This is a loan from individual companies, but it’s insured by the government. So we have to follow all the rules that the government sets, or they’re going to spit it back out to us and say, we’re not going to insure this loan. And then we’re kind of stuck because we already made the loan to you, right? And if the government won’t insure it on their end, we have to fix it or we have to do something with that loan because you have that money available to you. So that’s why we have to follow very strict guidelines in underwriting and making sure people qualify per the government. By government, I mean HUD. The Secretary of Housing and Urban Development sets all these rules. So but it’s basically a loan that design is designed for people 62 and over that you never have to repay as long as you live in the home. You can repay it if you want. And the house is still yours. So you must continue to pay your property taxes. You have to pay your homeowner’s insurance. So you have to do those things. You have to maintain the home. It has to be kept in decent order. You have to keep your name on title and you have to live there as your primary residence. You can’t get a reverse mortgage on an investment home. Wouldn’t that be sweet? Buy a rental property with no mortgage payment. That would be a great cashflow deal, but it’s not existent. You can rent rooms in your house as long as you’re staying there. We do not do loans on short-term rentals like Airbnb or VRBO type situations, VRBO. So you can’t do short-term rentals. But if you have a roommate, somebody that rents a room from you for six months at a stretch, that’s acceptable. All right, the other thing too is that there’s a lot of flexibility on how you can draw money from a reverse mortgage. You could take the money as a lump sum. There’s certain restrictions in the first year that you have to follow, but a lump sum is available. You can also set up a monthly draw where we’ll deposit money every month into your bank account. It’s not income. People tell you, oh, you can get a monthly income from a reverse mortgage. It’s not taxed. So it can’t be income, right? If it were income, it would be taxed. We all know the government taxes everything they can. This is loan proceeds. So you take a monthly draw. We could deposit $1,000 or 500 or 1,500, whatever you need within the limits of the loan. If you’ve got $30,000 available to you after paying off your existing loan that’s on the home, Well, you’re not going to be able to set up a very long payment if you want to get $1,000 a month. It’s not going to last for very long. But if you’ve got $200,000 available to you and you need $1,000 a month, that’s going to last quite a while. We can also leave the money in a line of credit. You can use it just like a HELOC, but no payment, right? You just have to live there as your primary residence and pay the taxes and insurance and such. But there’s no payment and you’ve got access to all that money that’s in a line of credit. And that line of credit grows over time. You’re not earning interest. That’s a little pet peeve of mine. But the amount of money you can borrow increases over time. So it’s very flexible. You could do any combination of that, too. If you own your home free and clear and we qualify you to receive $250,000, let’s say. You could take out $50,000 as a lump sum and then you want $1,000 a month over a set number of years or maybe depending on your age, we might be able to guarantee it for as long as you live in the home. And you might even be able to leave $50,000 or $100,000 set aside in a line of credit too. So you can do a combination of these and mix and match. And you can pay it down and you can reuse the money. It’s a very, very flexible program. I think it’s really good. Like I said, the house stays in your name. I said there’s no payment. I did not say it’s free money. There’s always, always a cost to money. We’re going to talk about the closing costs here in a minute. But there’s also… The cost ongoing. There’s interest charged. That interest gets added to the loan balance if you do not pay it. It’s a payment optional program. Most people do not make payments on these loans. If you’re getting charged $500 a month in interest on the reverse mortgage, your loan balance will be increasing by $500 a month. It’s called negative amortization. In other words, if you’ve ever looked at an amortization schedule when you get your loan, your 30-year mortgage, you see the first payment you make on a $1,200 payment, $1,198 is going to interest, right? And $2 is going to the principal. Well, over time, that amortization increases so that After 15 years, now maybe you’ve got $1,000 going to interest and $200 going to principal. Well, after 20 years, now you’ve got a lot more going to principal. With a reverse mortgage, it’s the opposite. It’s negative amortization. You’re charged interest every month, but you’re not paying it. That interest gets added to the loan balance. You’re going to get a statement every month in the mail, and you’re going to see that balance getting larger and larger and larger. If you don’t pay it. And I tell everybody this. I’ll tell you this if we ever meet. If looking at that statement is going to cause you more stress than the benefits you get from the loan, don’t do it. Just simply don’t do that loan. Do something else. You’ve got options. Anytime you’ve got a problem, we talk about this is intended to solve a problem. Well, maybe the problem is best solved with a HELOC. Maybe the problem is best solved by selling your house. Maybe the problem is best solved by not doing anything at all. We’ve got to look at all the different factors. What’s important to you? Is having a free and clear home the most important thing to you? For me, it’s not at all because you look at it, well, yeah, granted, you got a $500,000 home. You own it free and clear. That’s 500 grand that you cannot do anything with other than live there. If you get a reverse mortgage, you can tap into some of that equity and you can use it. You can’t buy medicine with equity in your home until you convert it to cash. You can’t buy gas. You can’t pay bills. You can’t take trips unless you convert that equity to something usable. Maybe a new mortgage with a mortgage payment would be acceptable to you. Maybe not. That’s where we have to look at your overall situation and the problem you want to solve with it. Okay, let’s talk about that. The problem, what is the problem you’re looking to solve? Are you looking to retire but you can’t because you have an existing mortgage? And you know that if you have to pay that $1,000 principal and interest payment, you’re not going to be able to on just Social Security. Or maybe you can, but then you don’t have money for anything else. And if an emergency pops up, then you’re kind of screwed because you’ve got to go borrow money To pay for that new furnace. But now you’ve got an extra $200 a month payment. And money was so tight before, it’s really going to hurt you. Or maybe you can’t qualify for it at all. What are you going to do then, right? That’s and if you get a reverse mortgage and you pay that that mortgage off that you don’t have to pay that twelve hundred dollars or thousand dollar principal and interest payment. And now you can retire and have that extra thousand dollars or twelve hundred dollars or whatever your principal and interest portion of your mortgage is in your pocket. Well, then it’s worth it. Is it worth it? I mean, you got to look at it, right? The closing costs, we’re going to talk on just a minute, but is it worth losing some equity? Because you’re not going to have as much equity as you would if you continued to pay that out of your pocket every month because your loan balance is decreasing with every payment you make. With a reverse mortgage, every payment you do not make, your loan balance is increasing. And you have to be okay with that. I know I emphasize this over and over and over again. And knock on wood, in 21 years of doing reverse mortgages, I’ve never, never had a customer or a family member call me and tell me they’ve regretted doing this. for a loan that I’ve originated. I need to qualify that because I have. I have had people call me and say, oh, I really regret doing this. But that’s because they didn’t understand how it all worked. They just were sold a bill of goods. Oh, no payment. Get out from under the payment. It’s a great it’s it’s a perfect loan. No, it’s not perfect. It depends on your situation. It’s perfect for some people. It’s not perfect for others. You, you are the only one that can evaluate it for you. You’ve got to get the facts to do it though, right? And part of the facts is closing costs. So let’s talk about closing costs. There are costs with anything. to borrow money. There’s closing costs for any mortgage you get, any HELOC you get, just about anything you get. Now, back in the day, 10, 12 years ago, we were able to do some reverse mortgages and we were able to absorb all the costs. If the costs were $15,000, I would credit you a $15,000 credit at closing. Believe it or not, we could do that then. That hasn’t been that way for a number of years. So now all the closing costs are added to the loan. I personally, the way I do business, I don’t collect any money from you upfront. The only time I collect an appraisal fee is if we disagree on the value. You tell me this home’s worth at least 750. And I look at the numbers. I don’t think so. I think that we’re closer to 650. And we have to have that 750 in order to get you enough to pay off your existing mortgage. In those situations, you say, I want to do this loan. This house will appraise for 750. And I’m pretty sure it’s not going to. Then I’m going to tell you, we’ll have a frank discussion. I’ll say, look, I’ve done some research on this. I’m pretty familiar with this. I don’t think the value is going to come in at $750. I could be wrong, but if it does, then all is good. If it doesn’t and you cancel the loan, I don’t want to eat a $650 fee from the appraisal. So I’m going to collect that money from you up front. That’s the only time I’ll do that. But every other time, and I haven’t had to do that in years, it’s maybe coming to that now because some people are still thinking their homes are worth a lot more than what they are. Although I haven’t had that issue yet. But hopefully we won’t. Anyways. Closing costs are all rolled into the loan with one exception. You have to talk to an independent counselor that’s approved by HUD, an independent third party approved by HUD that’s a reverse mortgage housing counselor. It’s not a psychological thing. They just want to make sure that you understand how the reverse mortgage works and that you understand your responsibilities. Mainly that you have to live there as your primary residence. You have to pay your property taxes and homeowners insurance. You have to maintain the home and keep your name on title. Those are your responsibilities when you have a reverse mortgage. Granted, those are your responsibilities most of the time, at least the financial aspect of it. You have to pay your taxes on anything, even if you own it free and clear. You have to pay your taxes and we’re heading in insurance. Same thing, but we’re heading down this road where even if you own a home free and clear, you’re going to need a reverse mortgage to get the money to pay the taxes and insurance. I did loans back when I worked for the evil empire and nationwide bank, I did loans in New York for people that were paying, shelling out, you know, it cost them $800 a month for taxes and insurance or a thousand dollars a month just to pay their taxes and insurance. Unfortunately, now with Tabor falling apart, that’s probably where we’re headed with taxes here soon and insurance going crazy as well. But I break closing costs down into three categories. Number one… Mortgage insurance, and we’re going to delve into that and explain the reasons why there’s mortgage insurance because most of my customers, I’ve never paid mortgage insurance in my life. I’ve always put enough money down. Why would there be mortgage insurance on this when we’re not even taking 20% of the value? We’re going to answer those questions. That’s one, though, mortgage insurance. Number two is origination fees. Yes, I do have to get paid. And that’s how I get paid, with origination fees. Number three, that’s everything else. The appraisal, the title insurance, the credit report, the closing fee, flood certification, all those little fees that add up. And we’re going to talk about how all those work. Okay. By the way, if you just tuned in, you are listening to Reverse Mortgage Radio. My name is Bruce Simmons. Call me with any questions at 303-467-7821. 303-467-7821. That’s my direct line. You can ring me anytime. Well, if you call at midnight, my phone, I leave it in the basement. So I’m not even going to hear it. You won’t wake me up. You can leave me a message at any time. In fact, sometimes people call me at 6 o’clock at night. Well, I’m having dinner. I don’t have my phone with me. I don’t bring my phone. It’s not attached to my hip all the time. But you can call me. You can also visit me online at reversemortgageradio.net. You can download my consumer guide. I’ve got a pretty in-depth consumer guide that digs into the closing costs there as well. On my website, there’s a quick form you can fill out and you can download that consumer guide. It’s totally free. All right. Let’s break down these closing costs. I mentioned the three categories. First of all, mortgage insurance. The reason you have to have mortgage insurance is mortgage insurance protects the lender, right? It’s not homeowner’s insurance. You’ve got homeowner’s insurance. You have to pay homeowner’s insurance. That protects if your house burns down or you need a new roof because of the hail. Mortgage insurance protects the lender. Remember I said the loan balance gets larger over time? It’s possible, not likely because we don’t loan 70% or 80% of the value anymore, but it’s possible that you could end up owing more on the home than it’s actually worth. Imagine that. What if the value of your home comes down? Your loan balance is going up, right? Well, the value of your home drops from $500,000 down to $300,000. The loan balance on your home goes from $200,000 to $350,000. Ruh-roh, you’re 50 grand upside down. That’s fine, as long as you continue to pay taxes, insurance, live there as your primary residence, all that stuff. They can never, ever, ever kick you out of the house. You have access to a line of credit still. If you have money in a line of credit or you’re receiving a monthly draw, that money is still going to come to you even if you’re upside down on the house. You owe more on it than it’s worth. How can we do that? How can the lender continue to give you more and more money when you owe more on the house than it’s worth? Mortgage insurance. Because if the mortgage insurance protects the lender, let’s say you pass away and you owe more on the house than it’s worth. In that situation, your heirs inherit the home. They do not inherit any of the debt beyond the value of the home. Your heirs have an option. They can sign the house over to the lender and walk away. If the house is only worth $300,000 and you owe $350,000, the heirs inherit the home, they can just walk away from it. The lender will foreclose on the house or they’ll take it back. They sell it for $300,000. They lose $50,000. Well, no, they don’t. The mortgage insurance pays them that $50,000. So they’re not losing anything. So they’re not going to come after your estate or your heirs for the loss. Now, obviously, most of the time, You’re going to owe $300,000. Your house might be worth $600,000 or $700,000. Your heirs inherit it. They sell the house for $600,000, pay off the $300,000 that’s owed, and they inherit the $300,000 in equity. Or you can sell it at any time. That’s a misconception. A lot of people don’t think they can sell the home when they have a reverse mortgage. Yes, you can. All right. That’s the mortgage insurance. The mortgage insurance also… Well, maybe it’s just the FHA or HUD protection, but that guarantees if ever you end up, the lender goes out of business, let’s say. Or let’s say the lender gets hit by a tornado, their corporation, and now they don’t have the ability to make that monthly payment to you. HUD will step in and honor that agreement on their behalf, okay? Those are the protections you get with mortgage insurance. Origination fee, that’s the fee the lender charges. to originate the loan. So that’s what keeps the lights on. That’s what pays the processing. That’s what pays me. That’s what pays for all the paperwork, all the overhead we have. I don’t make whatever the full origination fee. I get a percentage of it. That’s the way we’ve set it up where I work. The origination fee is calculated. HUD has a rule. We can charge 2% of the value of the home for the first $200,000 in value. After that, it’s 1% of the value to a maximum of $6,000. So let’s say you’ve got a $300,000 home. We could charge $200,000 on the first, excuse me, we could charge 2% on the first $200,000. So that’s $4,000. And then we could charge 1% on the other $100,000. That would be $5,000 would be the maximum origination fee that the lender can charge you. If you’ve got a $500,000 home, we charge 2% of the first $200,000 for $400,000 and 1% of the rest of the value up to a maximum of $6,000. So the most we could charge ever is $6,000. Now, a lot of times that’s a negotiable item. Maybe you say, well, I’d be willing to be charged a higher interest rate if you lower those costs, because things can be adjusted. But that’s how the origination fee works. All the other costs, the appraisal, title insurance, appraisals cost 650 bucks in the Denver Metro area. And they charge 750 for Boulder, Boulder County. If you’re in Boulder County, I’m sorry, that’s just the way it is. We do not collect any of that money. I don’t get a penny of that money. I don’t get a penny of the mortgage insurance either. The only thing we make is from that origination fee. But all the other costs are all what’s called pass-through fees. Typically, on let’s say a $400,000 or $500,000 home or $600,000 home in the Denver metro area, those fees are going to range between $22,000 to $24,000, maybe $2,500,000 probably, depending on the value of your home. If your home is worth more than $750,000… the title insurance is more expensive. If you’ve got acreage, the value or the appraisal might be more expensive. So they’re a little bit variable as well, too. You’ve got to keep all that stuff in mind. Those costs are all rolled in, like I said before. The only fee that’s out of your pocket is for the counseling. You have to talk to a reverse mortgage housing counselor before you sign anything. Well, technically you do not have to talk to the counselor before you sign. There are lenders that will do that. They’ll send you the paperwork after the first discussion. Sign the application. Yes, let’s go. They feel like they’re getting you committed. Don’t do it. If you’re shopping around and you can’t focus on just closing costs, by the way. The closing costs are one aspect of it. You’ve got to look at the problem you’re solving and is this reverse mortgage going to solve the problem? Look at the interest rate. Look at the long-term impacts of the reverse mortgage. That’s where that negative amortization schedule that I show you comes into play. Is your goal, are you set up, you’ve got a $700,000 home that you own free and clear, but you’re not sure that your half a million dollars that you have in retirement is going to last you because you’re only 62 years old and you’re thinking about retirement. Is that going to last you and provide the lifestyle you want for the next 20 or 25 or 30 years? Maybe getting a line of credit set up now that grows over time could really benefit you and give you the peace of mind you need. Maybe you want to retire and you’ve got this mortgage payment and you can’t do it. Maybe you need home improvements. You need in-home care, whatever it may be. All of those have to be factored in to the overall decision. You can’t make a decision about one thing based on one item of that thing. You can’t just look at the closing costs and say, what a ripoff. This is costing me $20,000. It depends on what the need is that you’re filling. If you had cancer and you had to spend $500,000 and that’s every penny you have in your retirement, but it worked, is it worth it? Most likely, most people would say yes. I mean, I know if most of the time your spouse would say yes, at least I hope so. I know I would do that for my spouse in a minute. I’d be very happy if she had cancer and I had to pay $500,000 to do it and I had it. I’d do that in a second. So closing costs are… are part of the overall picture. You have to factor it in. But it’s not the only factor. Keep that in mind. And call me with any questions about reverse mortgages. I appreciate you listening today. You’ve been listening to Reverse Mortgage Radio. My name is Bruce Simmons. I’m the reverse mortgage manager for American Liberty Mortgage here in Denver. Reach me at 303-467-7821, 303-467-7821, or visit me online at reversemortgageradio.net. You can watch testimonials from other customers. You can download my consumer guide, whatever. I look forward to hearing from you, however it may be. Thanks so much and have a great day.
