The key to a comfortable retirement may be sitting under your own roof.
In this episode, I'm going to address the question What are the pros and cons of a reverse mortgage?
Get ready, I'm going to dispel some myths that have been out there for years about reverse
mortgages and you'll be able to determine if one may be right for you and when?
So, my name's Doug Andrew I've been a financial strategist and a retirement
planning specialist for more than 47 years and so I've helped thousands of Americans in particular
optimize their financial assets based upon U.S tax code and what have you and minimize taxes in
retirement and empower their authentic wealth. So, they don't outlive their money. Because I've found
from doing this for decades that most retirees who outlive their money do that because of three
dangers. They don't know how to combat or eliminate or make themselves immune from taxes, inflation, and
market volatility and so they outlive their money. Well, when I see that a lot of times people do not
have the wherewithal to continue to have the same lifestyle in retirement. Because they didn't save
enough money they thought they were going to be in a lower tax bracket and they weren't
and they didn't calculate the negative impact of inflation on their retirement income that
was relatively fixed. Because the government only increases your social security benefits based upon
a formula that is usually only about one-third of the actual inflation rate. Did you know that?
In a nutshell, instead of comparing apples to apples a basket of goods and services each
year they actually can do an apples to oranges comparison which is ridiculous. This is so stupid
but they can compare a filet binyon steak one year to hamburger the next if they want and
say, "Well, people still ate red meat they have the same lifestyle even though you're eating a hamburger
instead of steak", okay. Now, this is what causes a lot of retirees who outlive their money because
every seven to ten years at the real rate of inflation. I mean, look at the gas pump look at food
lately. They have to double their income or take out twice as much out of their IRAs of 401ks.
So, what do we do here in order to make up for that? Many times people would come to me and
they would be so frustrated and I'd say, "Well, your greatest asset to maybe making ends meet
is sitting right under your own roof", and they go, "What are you talking about?". I'm going to explain
what a reverse mortgage is and why you may want to consider one sooner than later if you're retired.
But if this is already resonating with you and you can think of somebody who ought to watch this.
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Don't pay $20 for it on Amazon I'll gift it to you for free, okay. So a reverse mortgage.
This is where people many times have a home and it may even have a mortgage on it. So,
what have homes been doing? They've been going up in price and so that equity in the home is
an asset. Now, sometimes people think well this is my kid's inheritance. Most of the time when I
ask the children they go, "Mom, dad, we don't want the house. We don't care", this is your money and
so if your kids aren't greedy you don't have to worry about leaving behind a clear and free house
or a bunch of equity in your house to your kids unless you would rather suffer during retirement
or live off of social security charity well for your children for support. Is that what you want?
Most people realize, "No, I have my house but I have to sell it. But if I sell it then I have to pay
cash and buy a new one. I can't afford a mortgage payment." Well, do a reverse mortgage
stay in your house. How does it work? In a nutshell, Instead of you making a mortgage payment let's say
to the mortgage company. The mortgage company can make a payment to you for the rest of your life or
you can take a lump sum or you just simply get rid of a mortgage payment. I'm going to give you three
examples here in a moment of different ways many a savvy clients of mine have used reverse mortgages.
To be honest with you, my wife and I are doing one right now. I'm 69 and sometimes people say, "Well,
I've heard some bad things about reverse mortgages. They can take your house away from you." A lot of
these things are myths. So I want to outline these with you here in the next few minutes so that you
can begin to understand them better and if it makes sense you can then search out a reverse
mortgage specialist. There's several of them out there and go through the process if this makes
sense for you. So, when you're looking at a reverse mortgage the opposite is called a forward mortgage.
That's the kind of mortgage where you're paying down the mortgage with an amortization schedule
and you eventually maybe own your home free and clear. Well, can you take out a reverse mortgage
if you have a current mortgage on your house? Yes. A reverse mortgage is simply a kind of refinance
and there's three basic ways that you can do a reverse mortgage. If you've paid off your house you
can actually take a big lump sum or you can have the mortgage company send you a monthly payment
based upon your life expectancy. You can actually qualify for a reverse mortgage after age 62.
Okay, from 62 on I'm 69 right now. You can do it in your 70s or whatever but they're basically
looking at your life expectancy between you and your partner if you're married you have
a spouse and so they look at both of your life expectancies and they calculate it and if they
think you're going to live you know 12 years or 15 years between the two of you then they simply
calculate how much money they will give you. If you have a house worth 300,000 or 500,000 or a million
they may give you 400,000 and a lump sum. Okay, based upon how much longer you're expected to live
or they may say, "You know what, we'll give you two thousand, three thousand, dollars a month",
or maybe you have an existing mortgage and so they just basically take that and pay it off
and you got rid of your mortgage payment. I've helped many people get rid of their mortgage
payment and stay in the house the rest of their life. So, let me address some of the myths about
reverse mortgages and then give you an example of one or two or three that I've seen just recently.
So, off times people will use HECM. A home equity conversion mortgage. Sometimes people
use a home safe type mortgage and a mortgage specialist that does reverse mortgages will
explain the differences and what might be helpful to you and so what you're doing you
have to go through a counseling session and get a certificate. Because they don't want you doing
something or making a decision without being fully informed which is smart and so you can pay a lower
interest rate a little bit higher or if you've got already a huge mortgage on your property that is
at least 50 percent loan to value. But you live in a nice area where the real estate is appreciating
that the interest rate may be a little bit higher but you get rid of your mortgage payment the rest
of your life and you can stay in that home. So, the mortgage company secures the loan with your
property. Now, that mortgage is not doing payable in your lifetime unless you move or if you go into a
rest home or both of you. Between the two of you if you have not lived in the home for 12 months
or longer they may have a clause that says well it's due. Now, they don't come in and just foreclose
on your house they give you a chance. They give your children a chance for you to sell the house.
They'll give you a window of time maybe 90 days or 180 days to sell the house and you get all
the remaining equity. The lender does not grab all your equity. Now, if you want to walk away
if the mortgage has accrued to a higher balance than it's worth because of a recession you can
just turn over the house to the mortgage company if you want. You just do it a deed in lieu of a
foreclosure but most of the time homes continue to appreciate at three, four, five, percent a year.
They already know this. So, if you start out with a reverse mortgage of two hundred thousand or five
hundred thousand the balance just keeps growing. But your house keeps going up in value and so they
keep that spread and this allows them to then give you a monthly payment or that you can take a big
lump sum or you can just get rid of your current mortgage payment even though you owe $500,000 or
$700,000 on a house worth a million to or whatever. It doesn't matter what your property is worth
it's the ages of the people on the title and they will always combine those based upon life
expectancy. So, let me give you a few examples and this will help you understand it better. I have
a dear friend and client she's a widow has been a widow now for like 18 years and she has a mortgage
payment of ,800 a month and her house has doubled in value in the last 10 years because it's
appreciated over 7 a year. She's tired of having that 1,800 mortgage payment and so she simply did
a reverse mortgage. So now, the mortgage lender just took it over and said okay you don't have to make
the 1,800 payment anymore that's accruing and a loan balance. She can stay in the home the rest of
her life. They can never kick her out of her home unless she doesn't pay her property taxes or the
insurance on the home. You still have to maintain the home and pay property taxes and insurance.
But as long as she does that she doesn't have to make a mortgage payment if the house isn't as
worth as much as the mortgage balance they can't come in and take it over. That was the deal. That
was the risk they took. They calculated that. So, if the reverse mortgage starts out at three hundred
thousand it can grow to six hundred thousand, nine hundred thousand and they're counting
on the house going up. When you finally die if you have a house now worth a million and a half
and the reverse mortgage is a million three there's two hundred thousand of equity.
That belongs to your heirs. The heirs sell the house and get the 200,000 and the lien on it
just like any mortgage company the mortgage gets paid off. The mortgage was accruing
and so they can't come in and take your house away from you. The loan is never due as long as you live
in it and you pay the taxes and insurance for as long as you live. Does that make sense? I have
another gentleman and he did the same thing and he freed up about seventeen hundred dollars a month.
I have another close acquaintance that had about 800,000 of mortgages between a first and a
second mortgage but the house is worth a million and a half and they freed up $4,800 a month the
rest of their lives. They'll probably live another 20-25 years between the two of them. What can that
couple do with an extra $4,800 a month? Do the math that was a huge increase in their cash flow
by simply getting rid of the mortgage payment or if their house was free and clear they could be
taking three or four thousand dollars a month of income. One way or another they either save 4,800
or if they had a clear and free home they just created four or five thousand a month of income
and it's tax-free. So hopefully, you've gained some insights maybe into some opportunities you didn't
know existed before. There's a lot of myths out there about reverse mortgages. I'm not saying it's
right for everybody but it could be right for you. If you want to learn about opportunities like this.
I would strongly recommend that you visit our website. You attend our educational sessions.
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why this is my favorite financial instrument to have my serious cash. Where I would put my reverse
mortgage positive cash flow in order to keep it liquid, safe, earning predictable rates of return.