Welcome together, we're gonna explore our personal finances and figure out how to improve them. Whether you're just getting started in life on your finances, or you may already have a home and a car payment and you're struggling to get credit cards under control, are you getting a later start in life on saving for retirement, reducedebtincreasewealth.com is a podcast to educate those to improve personal finances, whether it's eliminating debt, or making smart investments. So let's now get started. Hello, Mr. Chuck here this week I'm going to talk about reverse mortgages. I know I've been saying that you cannot finance your retirement, but there is one option is not a very good one and it's reverse mortgage. So we're going to go over what is a reverse mortgages and whether or not you should do it or I don't even think you should put it in your retirement plans to even use it. So I'm going to start with an article from Bankrate.com. Everything you need to know about reverse mortgages by Holly D. Johnson. And under my new format, I'm going to read what I think it's important than make comments and then skip down I'm not going to read the whole article. If you want to read the whole article. I have a link in my show notes. Everything you need to know about reverse mortgages. Reverse Mortgage is a type of loan where the homeowner withdraws a portion of their equity But don't have to repay the loan until they leave the house. One of the most popular types is a Home Equity Conversion Mortgage, HECM, which is insured by the US federal government. The widely available HECM products are only offered by FHA approved lenders. Reverse Mortgages can be a solution for customers age 62 and older who own their homes outright, or have at least a considerable amount of equity to draw from me wondering why anyway, one borrow against a home when they worked hard to pay off, why not remain in your home and live their debt free? According to Steve Irwin, Executive Vice President of the National reverse mortgage lenders Association, nobody gets up in the morning and thinks about a reverse mortgage and where they should get one. Instead they think how they're gonna pay for health care, fix the roof, pay the property tax or housing have enough money to outlive their retirement. He says a reverse mortgage provides solutions to these issues and many others so people can live more financially secured lives as they age. Okay, well, that's some pretty good information right there. If you're strapped if you're retired over age 62, and you have a major event in your life, Such as, you need a new roof or healthcare issues, which is probably more likely, you can do a reverse mortgage. So what is a reverse mortgage? I mean, what if you already have a home you know what a mortgage is of regular mortgages, you go to a lender, they give you the amount of money you need to purchase the home and they give it all that money to you at once and then you use that to buy the home. Then you make a monthly payment over you know, 20, 25 or 30 years depending on your loan situation. Well, reverse mortgage is this the opposite of that. You go to a lender, and you got to be over age 62. And you have to have equity in your home. That doesn't mean it has to be paid off, but that's helpful. The lender then appraises your home, figure out how much equity you really have, and said, okay, you're eligible to borrow $100,000. But instead of getting $100,000, all at once, and then paying a monthly payment, it's just the opposite of that. They give it to you in payments, most likely based on your life expectancy. So if you're 65, and they look up the charts and they say, Oh, you going live to be 85. That's 20 years. So they figured out 100,000 divided by 20 divided by 12. And you get the idea. And that's how much your monthly payments got. To be, but there is also things you have to consider other than that, I mean it sounds good. Tom Selleck advertises that on TV, but the gotta have other things you must keep in mind and I'm going to continue reading an article who is eligible for a reverse mortgage, our primary homeowner must be age 62 or older to apply. However, Ervin says they have one spouse is under 62. You may still be able to get a reverse mortgage if you meet other eligibility requirement. For example, you must own your home outright or have a single primary lien. You hope to borrow against any existing mortgages you must you have must be paid off using the proceeds from your reverse mortgage. You must live in the home as your primary residence. You must remain current on property tax, homeowners insurance and other mandatory obligates Such as homeowner association dues, you must participate in a consumer information session led by HUD approved counselor, you must maintain your property and keep it in good working condition. You must be a single family home. A multiple multi unit property was up to four units, a manufactured home built after 1976 a condominium or a townhouse. Okay, well there's some pretty good stiff requirements there. So if your spouse is younger than 62 you gotta have the house outright, or only have one lender and you got to use proceeds from the reverse mortgage to pay that loan. And II course you have to live in there and you got to maintain everything else property tax homeowners, so you got to pay everything you normally are paying. So you got to keep everything up. You got to maintain the property and you have to live in it. So remember that have to live in it because that's an important factor in your decision whether or not you need a reverse mortgage. How does a reverse mortgage work, qualifying homeowners may not be able to borrow the full value of their home, even if it's paid off. The amount you borrow borrow also called the principle limit, varies based on the age of the youngest borrower, or eligable rule non borrowing spouse prevailing interest rates, the HECM FHA mortgage limit $726,525 As of February 2020, and your home's value. Generally the older you are the lower the interest rates and the more your property is worth, the more likely you receive a higher principal limit. This amount can increase each month because borrows with variable rate HECMS may be able to receive additional funds. If you choose a HECM with a fixed interest rate, you will receive a single disbursement lump sum payment. On the other hand, if you opt for reverse mortgage for the variable rate you can choose to accept equal monthly payments provided at least one borrow borrower lives in a property as their primary residence. Equal monthly payments for a fixed period of months agreed on ahead at times, a line of credit can be assessed until it's exhausted. A combination of a line of credit and fixed monthly payments for as long as you live in the house. A combination of a line of credit plus fixed monthly payment for a set length of time. The money you borrow via reverse mortgage doesn't need to be repaid until the borrower dies, moves out or leaves the home for any reason at some important Okay, so let's go back over that prevailing interest rate Right, you can like to get a fixed rate, a set amount, because remember, you got to pay interest. Even though you're getting 100,000, let's say, your payments gonna be reduced by an interest rate, because they're not giving them money to you for free, they're gonna charge you interest on all the money you receive. Now, at the beginning, when you first get your first few payments, maybe a year or two, it won't be a whole lot, especially now interest rates are down, but I bet their interest rates are higher than what you can get if you borrow the money. So if you receive a fixed rate, everything stays the same. If he goes variable rate, your payment could they're saying here could go up, you can receive additional money, but that's only gonna happen if that interest rate goes down. And if the interest rate goes down, you're good, but if the interest rate goes up, you're most likely gonna get less money and they don't say that in the article, you can take it two ways you can take a monthly payment or you can set up a line of credit, not use it until you need it. That might be a good thing. Remember, the money's got to be paid back. Once the borrower dies, moves out, or leaves the home for any reason. That's a good point. What is leaves the home for any reason? Let's say you got a single like your father or one of your parents. one spouse is deceased. So one is still living. They're struggling to pay, say their real estate taxes because they live in areas taxes are really high. So they take the equity out and they got no mortgages, they're setting good, they can live off their Social Security income, but they just come on up short of paying real estate taxes. So they do a reverse mortgage, and they set up the line of credit. So they're not they don't want a monthly payment, they just want a take use the line of credit when their real estate taxes are due so they can pay him to because that's a requirement of the loan. So they do that, you know, goes on five, six years, and they have plenty of money left still to pay the taxes, you know, for another 10 years are probably gonna outlive their line of credit. So everything's looking good, but then they get sick and they have to move to a assisted living facility. Doesn't matter he didn't die. And he didn't sell the home, but they move out to live somewhere else. that triggers that loans gotta be paid, if it's somebody that's in poor health or expect to be in poor health and won't be able to stay Their residences until date of death that could trigger that loan to be paid and how you gonna pay it if you didn't sell the house. They want their money before you sell the house be my guess. So beware there that is a negative that's a con. Furthermore, the borrower never owe more than the home is worth regardless of how much they borrow. What happens to their property value over time, the borrow or their heirs keep the difference if the reverse mortgage balance is less than the home's value at the time of repayment. So what they're saying is if you sell the home, the inheritance you know, if you owe less than what the value of the home and you sell it for more than the loan, you keep the debt you keep the access, and that's your inheritance or you or goes to the homeowner if he sold it before the death if you believe a reverse mortgage is a solution. For you applying for one is similar to a traditional home equity loan. Once you meet the eligibility criteria shop around find the best deal. Now my guess is the best deal is gonna be the highest value, they're going to appraise you your home the best, and they're going to give you the lowest interest rate. The lender will assess your financial situation including evaluating your credit history, any outstanding mortgage and ensuring your property qualifies, as in you don't have any active property liens. You'll also need to provide proof to be able to pay for ongoing housing costs and order a property appraisal to determine its value and how much you can borrow. And there's more than one type of reverse mortgage. Go figure. Now you know a reverse mortgage worth you want to consider which type suits your best predatory reverse mortgages. These are private loans not backed by any government entity. Typically you can receive a large loan advance from this type of reverse mortgage, especially those who have higher valued homes. single purpose mortgage, not as common as the other two options this type of reverse mortgage is usually offered by nonprofit organizations, and a few state and local government agencies. borrows can use the loan for one specific purpose Home Equity Conversion Mortgage, the most popular type of reverse mortgage and backed by the US Department of Housing and Urban Development HUD. These federally insured mortgages usually have higher upfront costs, but the funds can be used for any purpose before closing on h ECM all borrows money go through counseling from a HUD approved counselor. The point is to help you understand how a reverse mortgage works from someone who don't benefit from you taking out the loan. Well, that's a good thing. Okay, what's the pros and cons These are the main details to keep in mind. borrows does not need to make monthly payments towards their loan balance. Proceeds can be used for living expense debt repayment healthcare expense and more. funds can help borrowers enjoy the retirement. Non borrowing spouse not listed on the mortgage can remain in the home after the borrower dies. borrowers facing foreclosure can use reverse mortgages to pay off their existing mortgage potentially stopping there for closer. Those are all good things. I wonder what happens to the spouse a non borrowing spouse can remain in the home. So once the spouse moves out, dies or goes in assisted living, then it's probably gonna be payback. cons, borrows must remain in the home and pay property tax and homeowners insurance Reverse Mortgage forces you to borrow against the equity in your home, which could be a key source of wealth, fees and other closing costs could be high and can lower the net amount available. How much does a reverse mortgage costs? Well, that's a good question. Speaking at a higher cost, it's important to understand that the closing costs reverse mortgage tend to be significant. Most HECM mortgages let you finance closing costs into the new loan, however, meaning you won't have to fork over the money out of pocket. Here's a breakdown of HECM fees and charges according to HUD mortgage insurance premium, you'll pay a 2% initial MIP at closing as well as an annual MIP equal to one half of 1% of the outstanding loan balance MIP can be financed into the loan origination fee lenders charge a grater of 2500 or 2% of the first 200,000 your home's value to process yourHECM loan, plus 1% of that amount over 200,000. The FHA cap caps at HECM origination fees at $6,000. Servicing fees, lenders can charge a monthly fee to maintain and monitor their HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans for a fixed rate, or an annual adjusting rate of $35. If the interest rate adjusts monthly, third party charges third party charts your own fees for closing costs such as the appraisal, title search and insurance inspection recording fee and mortgage taxes. Also keep in mind interest rate for reverse mortgage tends to be higher than the traditional home equity loan. Course rates can vary depending on your lender your home value your credit worthiness month to month market fluctuation and other factors. Well, we knew that we know that your home equity loan is usually higher than your first mortgage. And so this is going to be higher than that. So let's say your first mortgage of 3%. Now we're talking today 2020, you can get a three and a half percent 20 year 30 year loan, but if you go out and get a line of credit, it might be four and a half 5%. And it might be adjustable. Well, this will be higher than that this might be five and a half 6% is going to be higher because they're going to be charging a smaller amount for first few years depending on if you take out if you set up a line of credit and don't use it and take out a whole bunch Or you take a monthly payment, reverse mortgage for time equity I'm not going to go over that shop around not going to go over that how to avoid scams. alternates downsize sell your house refinance the bottom line is see what this has to say. If you die or the home is no longer their primary residence for more than 12 months loans comes due. Which means either you or your your estate has to repay the loan or put the home up for sale to settle it. Let's say that you put the home up for say that the lender die or the borrower died. It's a state and then the state puts the home up for sale and that was 12 months ago. On a 13 month they're gonna want their money and you haven't sold it yet. Where's the money if you don't have any money or are you gonna get and that's a good point. So I guess that would be something you need to talk to the lender about. The beginning see what they say I mean it may never happen but it's something you need to plan for. Yeah, you got to take a mandatory counselor if you got to do H e cm through HUD is once you understand what you're getting into and, and they want you to get that information from somebody who's not gonna financially gain from you doing a reverse mortgage. Now a quick word from my sponsor, isotonic, I said tonic is a vitamin. It's a way you take a vitamin it's how your body is built to take vitamins with isotonic rapidly as sorted by the body highly concentrated of vitamins and minerals and maximum results. I've been taking isotonic vitamins for the last six years and I rarely get sick. I highly recommend taking isotonic vitamins. With standard tablets you have minimal assumption and diluted nutrients. I take the daily essential kit which is all the daily essential vitamins that you need for your body on a daily basis. Go to my website, reduce that increase wealth.com upper right hand corner, click on the heart, go to the website. Let us show you the future of vitamins. I have another article I like to go over the name of it is five signs of reverse mortgages a bad idea by Amy for not finale, the again i'm not i'm just going to go over the key points. You know the requirements. So one of the bad signs is your heirs inheritance if you want to leave money to your beneficiaries, your children or grandchildren. This would eat up some of that if not all of you live with Somebody else, if you have friends, relatives or roommates living yet who are not on a loan paperwork, if something would happen to you and you had to move out or if he died, they would have to move out. Also, you have medical bills, you must be healthy enough to continue dwelling within the home. So depending on how bad your health is, it may or may not work, you might have to move soon. Maybe you're on early onset of dementia, or other things you can afford the costs. Maybe you don't make enough money to cover your property taxes, your homeowners insurance and the maintenance of the home. And then that would be a definitely a sign that it's not going to work out. So that article, it's a little bit longer than that. I just covered the highlights. Those are all very good reasons why it may be a bad idea. So the question still remains should a reverse mortgage be included in your purchase? financial plan? I say probably not, especially if you're younger, and you just get in the home. And are you just starting to save up for retirement? don't plan on using something that may not exist because maybe your home won't have any equity. You know, you know know what the values are the home con i do. Traditionally home values go up. Real estate is usually a good investment, and they're going to go up over time. The longer you stay there, the better off you're gonna be. But that's nine not always be the case. You never know what's gonna happen. So don't plan for it in unknown. The best way in your personal financial plan to plan for retirement is is to put money aside today. Don't count on something that may never be there or may be limited. Because you don't know what your health is gonna be like. You don't know what your incomes gonna be like. Don't know how much retirement you're gonna have. There's too many unknowns to have that in your plan. So just know about it is about all you need to do. Now, if you're a senior, and are getting close to being a senior, and you're afraid that you're going to be short of money, but if you're healthy and got a decent amount of income and just say them earlier, I say you maybe just didn't have enough money to pay the real estate taxes. You live in an area that has high real estate taxes, but you can afford the insurance and the real estate in maintenance and everything else related to that property. And you want to try to keep it at a minimum so you can pass it on to your heirs. It's a family homestead, for instance, but you just don't have enough cash to pay the property taxes, or don't have enough income to pay the property taxes but you can still live there and live a good life. Then that may be an option you could consider. The main reason why you may want to use it is if you're a senior, and you got plenty of money to pay your bills, but you want to do a major renovation of the home, and you don't want to have to pay for it in the future. Well, you could do a reverse mortgage, take out your equity, use the equity to make the home improvements, and then pay it off when you sell the property. Or when you die and let your grandchildren pay it off, let your inheritance maybe you got enough money in your investments, that when you pass away, you can just pay off the balance and the homestead stays in the family and On we go so that that could be an option if you want to put off paying monthly payment or getting another mortgage in that case. That's the end of another episode. I hope you found a useful and if you would like to share this episode with your friends please do so. I'm open for any suggestions for improvement or for information that you would like to talk about in future episodes. You can go to my Facebook page and leave me a message more than glad to comply. To find my Facebook page go to reducedebtincreasewealth.com and click on the Facebook icon to go to my Facebook website.