In this episode of Reverse Mortgage Radio, we delve into the intricate details of the Life Expectancy Set-Aside (L-E-S-A) and its pivotal role in reverse mortgages. Host Bruce Simmons provides insights from the recent National Reverse Mortgage Lenders Association Conference, highlighting the pros and cons of L-E-S-A and why it’s crucial for financial planning as we age. Learn how reverse mortgages work, who qualifies, and how they can positively impact the financial stability of seniors.
00:00:02 Introduction and Overview of Reverse Mortgages
Hello, Reverse Mortgage Radio listeners. I hope you are having a fantastic weekend. Today, I want to talk about the Life Expectancy Set-Aside, also known as LISA, L-E-S-A, for Life Expectancy Set-Aside. As the show unfolds, I’m going to explain what it is, why it is, and how it works, and also why why it’s a good thing that might also be a bad thing? You bet. We’re going to talk about all that and more. See, last week, I attended the National Reverse Mortgage Lenders Association Conference. NIRMLA is what it is. N-R-M-L-A. All these acronyms. You’ve got to love it, right? But it was in San Diego last week. And it’s really great because they’ve got fantastic sessions about the reverse for purchase, about all kinds of networking events and all kinds of things. And one of the sessions talked about the life expectancy set aside. That’s what made me realize it’s been years since I’ve talked about it on the show. I’ve gone over all aspects of the reverse mortgage and how it works, financial assessment. the heckum for purchase, the line of credit, payment options, closing costs, everything. If you want to find more information about reverse mortgages or listen to some of those past shows, you can visit me on my website at reversemortgageradio.net. Reversemortgageradio.net is my website. And on there, you can go back, I think, seven years, more than seven years I’ve been doing this show, and all my episodes are on my website. You can also… Complete a form on there to get a quote. See how much money is available on a reverse mortgage for you. Or if you just want to gather general information, you can download my free reverse mortgage consumer guide on there. All of that’s on the website. So please go visit me at reversemortgageradio.net. And I’d love it. Also, if you chose to give me a call, you can reach me directly at 303-467-7821. 303-467-7821. That’s my direct line, and it’ll ring right to me. So if you have any questions, you want to just pick up the phone and call me, I’d love to talk with you. You can explain to me your situation, and I’ll let you know, hey, does a reverse mortgage work for you or not? And if it looks like it might be something for you, we can set up a time to meet, and I’ll come to you. I’ll come to wherever you live along the Front Range. I mean, if you’re in Grand Junction or something, I might not do that. But what I would do would be to prepare numbers for you and I can send you a video explaining what all those numbers are in black and white. So I go through line by line with you about all the different costs, the benefits, the amortization schedule that shows how the loan balance grows, how your line of credit grows, how the interest works, all that stuff. So give me a call 303-467-7821. Now, Well, I should also touch on what a reverse mortgage is. In a nutshell, a reverse mortgage is most often an FHA-insured loan that’s specifically designed for people who are 62 or older, and at least one of you has to be 62. If you’re 55 and you’re married to somebody that’s 64, more power to you, but that 64-year-old is the one that would get the loan. As long as one person is over 62, you can do a reverse mortgage. But then what happens is the loan, it is a loan on your home. You’re not giving up title to your home. You’re not selling your home to the bank or any of that stuff. As long as you continue to live in the home, pay your taxes, property taxes that is, your homeowner’s insurance, and maintain the home and keep your name on title, Those things have to be done and you are never required to make a mortgage payment. However, you are still charged interest. You don’t have to pay it, but you’re charged interest as well as mortgage insurance because this is an FHA contract. insured loan. FHA stands for Federal Housing Administration. So it’s a government insured loan. They set the rules. And any kind of mortgage insurance you are charged goes to the federal government to protect in a couple of different ways. They protect the money that’s left over. So the way reverse mortgage works is we have to loan you enough to pay off your existing mortgage on your home because the reverse mortgage can be the only loan against the home. It works just like a refinance. If you were going to the bank and you wanted to lower your interest rate from 7% to 5% and you refinance and you get this new 5% loan and your payment drops, well, what happens is the new lender, they pay off the old loan. And now you’ve just got this new one. That’s how a reverse mortgage works. The reverse mortgage pays off your old loan. So you have no mortgage payment, no required mortgage payment. You can make payments on this loan if you want. And there’s benefits to that that I’ve gone into in past shows. Or just give me a call if you have questions about it at 303-467-7821. But then what happens is you’re still charged interest every month on only the amount you take out. But if there’s money left over, let’s say your mortgage is $100,000 and we can loan you $175,000. Well, then that $75,000, you say, hey, I don’t want it. I don’t want to be charged interest on money I don’t need right now. So we leave that set aside in a line of credit for you. And the government guarantees 100% that that money is going to be there for you as long, remember this, as long as you or your spouse are living in the home, keeping your name on title, keeping current on your property taxes, your homeowner’s insurance, and maintaining your home. As long as you do those things, no payments are required. And that money is always guaranteed to you. They also guarantee if ever you end up owing more on the home than it’s actually worth. Because, see, the way the loan works, you’re not having to pay interest every month, but you’re still charged interest. So where does that interest go that you’re charged? It doesn’t just disappear into the air. It gets added to the loan balance. That’s why I always tell people every month you’re going to get a statement in the mail or nowadays you can check it online and you’re going to see that loan balance getting bigger and bigger and bigger. If looking at that statement and seeing that loan balance grow causes you more stress than the benefits you get from whatever the benefits are from the loan, paying off your existing mortgage or giving you additional cash flow, whatever the benefit is, if the balance growing causes more stress than that benefit, Don’t do the loan. That’s why I am always very specific with people in going over the amortization schedule. You’ve got to be comfortable with that. If you’re not, don’t do the loan. Now, if you’re not sure if you’re comfortable, I’d be happy to meet with you. I’m meeting with a couple in Castle Rock next week. I’m going to go down there, and we’re going to go over everything. But she’s not real comfortable. The woman is not comfortable right off the bat with the loan balance growing. And I was explaining to her, yes, you can make payments, though, if you wanted to. But you don’t have to, obviously. But if you don’t, that interest gets added to the loan balance. Keep all that in mind. But then at the end of the loan, the loan only comes due when the last homeowner permanently leaves the home. At that point, your heirs inherit the home or you can sell the home at any point. There’s no prepayment penalty. If you sell it, say, for $700,000 and you only owe $300,000 on the reverse mortgage… You keep the $400,000 difference. If you pass away and your heirs sell the house for $700,000 and only $300,000 is owed, they keep the $400,000 in equity. The lender can only take what’s owed to them, which is whatever you borrowed plus all the accrued interest over the years. And that can add up, especially at the higher rates that we’ve seen. Now, rates have come down some. but it can add up over time. But we don’t loan 70% or 80% of the value. So odds are there’s going to be a lot of equity left in your home. Okay, let’s jump into the show. But you know what? I forgot. I wanted to touch on this real quick. A couple of weeks ago, we talked about aging in place, and how a reverse mortgage can help you do that. Well, there was a study recently by the National Council on Aging in the University of Massachusetts, and they say that 80% of the 60 and older population are unable to afford a either long-term care or basic necessities like food, reflecting the serious financial challenges faced by older Americans despite their overwhelming preferences for aging in place. This is from an article that I read that came out this week on Reverse Mortgage Daily, and it’s by Chris Clow, C-L-O-W. You can subscribe to it. Anybody can subscribe to it. It now is a cost. It didn’t used to be a few years ago, but it’s through a company called Housing Wire. They own reverse mortgage daily. And there’s, I think it’s like $100 a year fee or something like that to subscribe to Housing Wire. But if you go to housingwire.com, you can find stuff like this. It’s really interesting. Well, if you’re a nerd like me on this stuff, but yeah. What he talks about in this article, he’s talking about that study. He says the analysis from the National Council on Aging is titled, Increases in older America’s income and household assets still cannot support most dream financial hardship. According to the NRP report, that’s National Republic Radio, National Public Radio. They’re the ones that commented on this study that Chris Clough found. Anyways, he says, the National Public Radio says, it looks like financial state of older Americans by comparing the income, housing value, retirement, and other savings of people 60 and older with the cost of living, excuse me, the cost of long-term care. It also is made up of an online tool called the Elder Index, which illustrates the amount of money an older adult will need to live independently. The 80% share translates to roughly 27 million households, according to the data. So 80% of people 60 and over equals 27 million households. He says part of this could be tied to a lack of true awareness regarding the cost of necessities in later life, as well as the limitations of a fixed income. We know that if you’re on a fixed income. Then there’s a quote here. It says, I think the big issue is in terms of education, says Laura Marinaro, a legal professor and board member of the National Academy of Elder Law Attorneys. Also, she says, if people kind of operate from the assumption that their Medicare will take care of this, then they might not make certain plans or save for long-term care. Certain people are also dead set against the idea of moving into nursing homes or other congregate care settings. This might stem from thinking that they’ll never require such care, she added. But many older Americans end up developing certain health complications and Data from the National Council on Aging puts this figure at nearly 70% of those 65 and older as having some kind of health issue that requires dedicated long-term care. This is me talking. I think that quote is, I think that’s a little misleading because I don’t know, that sounds kind of crazy. I think they mean nearly 70% of those 65 and older will have some kind of health issue. not they’re currently having some kind of health issue. That’s just my opinion. But the article goes on and says, Americans may also be challenged by the negative shock to their wealth, often brought about by health issues that sap their savings and place them in financially precarious situations. This is according to Cheryl Keem, executive director of Neighbors Who Care, an Arizona-based nonprofit that connects seniors with volunteers who help them remain in their home. Even though folks do prepare, unexpected health issues that they have not prepared for when they crop up could push them into a new category of needing assistance, Keene told the outlet. Aging in place has a number of advantages, particularly as it relates to living costs when compared to dedicated care facilities. But recent data has emphasized the challenges that some can face pertaining to feelings of social isolation and loneliness, as well as the necessity of for adequate planning to support long-term aging in place goals. And that’s what some of the stuff we talked about a few weeks ago on the show. More than half of baby boomers have expressed no desire at all to sell their homes. There’s also information to suggest that home builders though are increasingly ready and able to explore the big business potential for those seeking to renovate their homes and better accommodate their challenges to mobility, vision, and hearing. And again, that’s how the article ends. But we talked about all that stuff on the show. Well, it was less than a month ago. I don’t remember what episode it was. Go to my website at reversemortgageradio.net. Since you are listening to Reverse Mortgage Radio, that’s a Great name for my website, reversemortgageradio.net. You can check out past shows. You can listen to this whole show if you haven’t, if you picked it up halfway through, or you have to leave and you want to hear the whole thing. Anyways, you can also give me a call at reversemortgage, excuse me, give me a call at 303-467-7821. Now let’s jump into the topic this week, which is the life expectancy set-aside. Now what the heck is that? What am I talking about? Well, life expectancy set aside, what the lender might have to do or what you can require too. But what we do is we take a portion of the loan proceeds that we’re making available to you. So a part of the loan that money is available to you. And we set it aside to pay your taxes and insurance. And if you’re in a flood zone, your flood insurance on your behalf over the estimated life of the loan. Now, what does that mean? Basically, actuarials get their big thinking caps on And they say, OK, based on your age, if you’re 73 years old, we’re going to estimate that you’ve got about 11 or 12 years left to live in your home. Now, that doesn’t mean that you’re only going to live for 11 or 12 more years. But living in your home for that time period, you may have to leave your home. Just like, you know, not everybody has all the benefits of Jimmy Carter, right? Being able to be in hospice in his home. Some people can do that, and a lot of people can with long-term care insurance. Hopefully you have that. But basically, what happens is there’s something called financial assessment with reverse mortgages. That’s where we look at your credit and your income, and we see, have you paid your bills, especially your housing bills, on time? Have you paid your taxes and insurance and all that stuff on time? We want to make sure your homeowner’s insurance, believe it or not, Has been paid on time. Or your HOA dues. That trips up a lot of people. Because that’s one of the things. I know years ago. I was struggling financially. And I remember. Putting. We had little kids at the time too. And we had a pool. Have a pool with the HOA. It’s not. It wasn’t very much. It was like 40 bucks a month at the time. But. I was broke. I had a tough time. This is before I got into the reverse mortgage world. And I knew about credit, though, because I’d been in the finance world a little bit with consumer finance. And I didn’t want to not pay bills that would affect my credit. But HOAs, homeowners associations, they don’t report to credit bureaus, right? So I didn’t pay it for a while. Now, eventually, they sent me a bill saying, you’ve got to pay or you’re not going to have access to the pool. And the kids love the pool. Eventually, we found the money. We got caught up and made sure we paid on time after that. But I have seen cases where people have not paid their homeowners association on time. Sometimes it’s confusion, too. Change of management companies, things like that really mess people up. But we check two years history of homeowners association dues. You have to pay those on time. You have to pay your property taxes on time if it’s your responsibility. If your taxes and insurance are escrowed, well, that’s all the better. Then you know those are paid on time. But we have to check all that stuff. And then we also evaluate your income to make sure you’ve got enough income to be able to afford to live in the home. We want to make sure that this is a sustainable solution for you, the reverse mortgage. We don’t want to give you money for a reverse mortgage, pay off your existing loan, and then have you not be able to pay your taxes next year and go into default. And then the lender has to foreclose on you in two years because you didn’t pay your taxes, and you got foreclosed on twice. Because you have a reverse mortgage. That’s what the headline will say. And we don’t want that. Number one, we do not want to kick grandma out on the curb. That’s not, not what this loan is about. This loan is intended to relieve financial stress, not create it. Okay. But if you own your home free and clear and you don’t pay your taxes, guess what? You’re going to end up out on the curb, okay? Because it is a mandatory thing. You’ve got to pay the man, right? That’s part of the deal. Anytime with homeownership, you’ve got to pay your property taxes. You do not have to keep homeowners insurance if you own it free and clear. But then, of course, if your house burns down, then you’ll be out on the curb. But we want to make sure that you can afford to do that and that you’re responsible enough with your money. And we check that by your credit rating. If you don’t qualify, we could possibly probably still do the loan for you. But what we have to do is we say, you know, we can’t trust you to pay your property taxes and insurance on your own because you’ve messed up before or because you just don’t have enough money. So what we’re going to do is we’re going to take this money away that would be available to you on the loan and set it aside in an escrow account. You are not charged interest on that money until it’s used. So come February of next year, we pay the first half of your taxes. You’re going to look at your statement and you’re going to see, In interest charges, you’re going to see a mortgage insurance charge because you’re still charged mortgage insurance on these loans, remember. And then also, you’re going to see $1,500 or whatever your half tax, that first half tax bill is being added to your loan balance. At that time, you get charged interest on it. And then if come May, your insurance comes due and that’s $2,000, we pay that and that gets added to your loan balance. In June, we pay the second half of your taxes and that gets added to your loan balance. But the rest of the money that has not been dispersed is not taxed. That’s one of the biggest benefits of this. But the thing is, the challenge, what makes this bad, I guess, is that it could be a large chunk of money we have to set aside. If we’re setting aside money for 12 or 14 years for you, or 20 years if you’re on the younger side… That could be $60,000, $70,000, $80,000, $100,000 depending on how much your taxes and insurance are that we have to take away from you. So let’s say, for example, we can loan you $250,000 and you’ve got a $200,000 mortgage. Well, without the lease in place, we loan you or we pay off the $200,000 mortgage and you’ve got 50 grand left over. You say, I don’t need it. Just leave it in the line of credit. That’s great. We do that for you. You’ve got that $50,000 extra. But let’s say that we have to do a lease. We have to set aside money to pay your taxes and insurance with the life expectancy set aside. It works as long as that amount that we’re setting aside is less than $50,000. So let’s say that it’s $50,000 we have to set aside. We take the first 200, we pay off your existing mortgage. Then the other 50,000, we set aside to pay your taxes and insurance. Well, great. There’s no money left over. But you don’t have a mortgage payment, and you’re not even responsible to pay your taxes and insurance. So if your principal and interest taxes and insurance payments, like $2,000 a month, that’s $2,000 a month extra you’re going to have in your pocket. You’re charged interest on whatever interest the loan is, and you’re going to be charged interest on the disbursements for the taxes and insurance, but you’re saving $2,000 a month. Imagine that. But what if your taxes and insurance set aside is $75,000? Well, you’ve only got $50,000 left over. In that situation, either you come up with $25,000 or we can’t do the loan for you at this time. Now, I always say, let me do a quick caveat, because just because we can’t do the loan for you today doesn’t Doesn’t mean we can’t do it for you a year from now or even six months, depending on interest rates and home values. If the home value goes up a lot, interest rates come down. As interest rates come down, we can loan more as a percentage of the value of your home on reverse mortgages. So let’s say the interest rate drops by a percent and your home value goes up by $30,000. Well, then maybe we can help you out. But I don’t know the exact numbers. It just depends. So I always tell people, Call me if you see your home value going up or you see about rates coming down. I’d love to talk with you again. And it doesn’t cost anything to call me and let me run numbers for you. But that would be where the life expectancy set aside is bad. If we can’t loan you enough. to pay off your mortgage and set money aside for taxes and insurance. It’s a great thing. It really is a good thing for people who, let’s say, you’ve been paying a mortgage with taxes and insurance escrowed for the last 50 years because you keep refinancing, right? And you’re 75 years old. Your memory is starting to go a little bit. You’ve always had the lender pay it for you. Well, in that case, imagine having us pay that taxes and insurance for you. Now, we’re using your money, and you’re being charged interest on it, so don’t feel like it’s free money. But imagine the stress. The relief of not having to pay your own taxes and insurance because you’re not having to worry about when is that bill supposed to come? Because it’s not a normal payment, right? It’s not a monthly bill. You can set up to have your monthly taxes or your monthly, excuse me, your insurance bill to you monthly. taken automatically out of your bank account. But taxes don’t work that way. And some people forget. They’re like, oh, yeah, that’s right. The taxes were due in February and now it’s May. Oh, man, what am I going to do? Well, you’re in trouble. I mean, you could still pay it, but you’re paying it late and you’re going to pay penalties and things like that to the counties. So that’s where it can help you to allow the lender to set that money aside for you. And then you just got extra money in your pocket every month too. A couple of caveats or a couple of quick things I want to do touch on because you can run out of money. If we set aside $40,000 for you to last for the next 10 years and taxes and insurance spiral out of control and it only lasts eight years and you’re still living in your home, Well, what then? You’re out of money in the set-aside. It’s your turn to pay. Then it’s your responsibility. The lender will send you a reminder before you run out because they do an annual estimate. They’re going to say, hey, this year you’re going to run out of money, so you better start budgeting for it. And you can also possibly refinance your reverse mortgage at that time to do it. The other thing is, There’s something called a non-borrowing spouse. And this is a rule that FHA put into place back in 2014. Basically, I said at the beginning of the show, if you’re 55 and you’re married to somebody 64, you can still do the reverse mortgage. The loan is just in the 64-year-old’s name. And because the way it works is the 64-year-old is the only person who can access any money from the reverse mortgage. When that 64-year-old leaves the home permanently, whether he or she dies, moves to assisted living, whatever, the loan comes due. But if there’s a non-borrowing spouse in place, then there’s what’s called a deferment period. The loan does not come due. The spouse can continue to stay there. However… Since the spouse, non-borrowing spouse by the name of it, is not a borrower, he or she cannot access the money from the reverse mortgage. If there’s money in the line of credit, that gets closed out. It’s not available to the spouse, the non-borrowing spouse. If we, the lender, is paying your taxes and insurance, that gets closed out as well. That will not be paid any longer on… To you. So that money, you say, well, wait a minute. They just kept all that money. No, it’s not. We didn’t take it to begin with. It’s just sitting as unused equity in the house. OK, it’s kind of confusing. But that money that you’re tapping into with the life expectancy set aside isn’t real money. It’s equity in the house until you use it. Then we add it to the loan balance. And because your balance is higher, your equity is a little lower at that point. But you’ve got to be aware of that if you’re a non-borrowing spouse. And we go over all that stuff in that case. If you are a non-borrowing spouse and there’s a life expectancy set aside, I’m very clear on that. Thank you so much for listening to Reverse Mortgage Radio today. I hope you have a fantastic weekend. And I do really would love to talk with you. Just feel free to call me with any questions about reverse mortgages. My name is Bruce Simmons. I’m the reverse mortgage manager. You can reach me at 303-467-7821. 303-467-7821. Or visit me online at ReverseMortgageRadio.net. ReverseMortgageRadio.net. You can get a free quote there. You can download my consumer guide. And there’s also a ton of other information on my website. Hope to see you soon. Thank you so much.
