Reverse Mortgage, a Hidden Retirement Asset
MARTHA SHEDDEN
Marina, let’s begin with how you came to be a reverse mortgage specialist.
MARINA WATTS
As many people recall, back in 2008 we had the housing crisis and a mortgage meltdown. I had a house that was impacted by that. I had bought it in 2007, and by 2009 I was underwater. A friend who had been doing reverse mortgages for years told me, "It's too bad you aren't 62 years old. You could possibly do a reverse mortgage." That piqued my interest, and the more I learned about reverse mortgages, the more interested I became. I saw them as an amazing solution that I didn't know about. A couple years later, I was offered an opportunity to join his team. I did, and I haven’t looked back since. I love it.
MARTHA SHEDDEN
That’s interesting, that it was a personal experience that made you aware of the program. You work with home equity conversion mortgages, which are also known as reverse mortgages, and are designed for individuals 62 years and older. Can you quickly describe what these mortgages are, who they work well for and why they exist?
MARINA WATTS
They've actually been around for quite some time. The first reverse mortgages started in the 1980s. They were looking for a solution for seniors who have a drop in income when they retire and may not be able to continue to make mortgage payments. That can create a national problem if they need new housing. So, HUD and FHA regulate this program that they insure for people 62 and over, where they can turn their existing mortgage into a reverse mortgage, which doesn't require monthly payments, and therefore they could stay in their home and age in place. So, it helps the seniors. It is age 62 for the general program, and there's a new proprietary reverse mortgage for folks as young as 55.
Basically, this helps them with an income stream. Instead of having this monthly mortgage payment, it's an optional payment. People say, "How could that be?" Well, the way it works is you basically aren't making payments. Then, when you permanently leave the home, that mortgage balance with interest becomes due. You're pulling from your home's equity without selling it. It’s the only way to do it besides a home equity line of credit. It’s best for people who have at least 50 to 60% equity in their home and are planning on staying there for the duration. They're not thinking of leaving next year.
So, if you've made the decision that you want to stay in your home, at least for the immediate future, it's designed for you. If you're someone who is at a decision-making point about maybe moving to a different location, or upsizing or downsizing or right-sizing, this may not be the perfect time. So, wait until you are in that perfect home and then do the reverse mortgage.
MARTHA SHEDDEN
There are still a lot of myths out there about reverse mortgages. One is that you immediately sign over ownership of your home. People also wonder if you’re allowed to sell your home if you have a reverse mortgage.
MARINA WATTS
Yes, that’s one of the old myths that’s still around. I still see some people thinking this means they’re signing away their home, which of course is not true. It's just like any other type of mortgage, where it's a lien against your home and it will have to be paid off at the time you sell it or move out. As for being allowed to sell? Absolutely. You're still the owner and you could sell your home at any time. You can prepay off the loan at any time without any kind of penalty.
MARTHA SHEDDEN
If you sold that home and moved into another one and the circumstances worked out, could you then apply for a reverse mortgage on that?
MARINA WATTS
You could. But you can only have one reverse mortgage at a time because it's your primary residence. If you were to sell, the reverse mortgage would be paid off when you sell the home. If you move to another home, you could use a reverse mortgage to purchase the home or do it after you've bought the home, your choice.
MARTHA SHEDDEN
It sounds like there’s a variety of options about how to set it up.
MARINA WATTS
There are a lot of options and flexibilities. Also, I think people don't know about how you can take your benefits. Some people get a monthly check. Or a very popular option for folks who own their house outright or have a lot of equity is a line of credit, where you set it up as an emergency fund when you may need some funds. Unlike your typical line of credit with the bank, it's easier to qualify with the reverse mortgage, for the reasons we've already talked about, that it’s FHA and HUD approved and regulated. Most of my clients qualify based on their Social Security alone.
Now, if you go to your local bank, they're probably going to want to see your employment income, or significant income in order to take out a traditional HELOC, or home equity line of credit. A lot of seniors may only be on Social Security, and that's going to be very difficult to qualify for a bank loan.
MARTHA SHEDDEN
With so many people living just on their Social Security, but having all this equity in their homes, this really provides them a backup plan if they need more money.
MARINA WATTS
Exactly. Homes are more expensive now. Previous generations didn’t think about their homes as another asset, whereas modern financial planners include your home as part of your portfolio, and it is an asset you can use to leverage your income or your income stream. You can pull money out of it. You can put money back into it with the line of credit. It's basically another financial tool that's available to seniors or folks over 55 to access some of their equity they've built up in their home, without having to sell it.
MARTHA SHEDDEN
What other common misconceptions do you hear from people that you work with?
MARINA WATTS
People think once you’re in a reverse mortgage, that’s it, you’re stuck, and that simply isn't true. You can sell your home or change your mind and move out, or pay off the loan at any time. You're not stuck in it. Other people think it’s just for the elderly. To be honest, the majority of my clients are boomers and they're looking to retire. They might come to you and find out that their Social Security will only get them so far.
Many have mortgage payments. It's much more common now for people to still have a mortgage at the time of retirement, instead of having their house paid off. They're looking at it and saying, "I can't retire comfortably on just Social Security. Something's going to have to give. We're going to have to move away from the friends and family we love to a less expensive environment, or work part time.” This becomes a solution once they learn about the flexibility of the home equity conversion mortgage, and what it can do for them. It becomes sort of an aha moment. “I have this other tool. I don't have to move in order to retire comfortably. I can use my Social Security and my home equity as a way to create wealth and an income stream in my retirement.
MARTHA SHEDDEN
Let’s talk a bit more about Social Security. Tell me how you see Social Security interacting with these types of mortgages.
MARINA WATTS
I primarily see people who have already started collecting Social Security. As you know, a lot of people claim early and then they may continue to work, but then something happens. This past year, it was the pandemic. People lost their jobs. When they had their Social Security income and their employment income, they were fine, but when employment income went away and they’re looking at just Social Security and having to make this big mortgage payment, it’s a problem.
The primary scenario I see with boomers is they want to retire. Maybe they’ve refinanced their homes several times to take advantage of lower interest rates that are tempting. But you set the clock back to zero when you refinance. Now they’re 65 years old and they have a 30-year mortgage. But instead of doing that, maybe their financial advisor can say, “Let’s bring your home equity into the conversation. You can pull cash out of your house that's tax free, instead of dipping into your retirement funds." Or instead of claiming Social Security, a financial advisor may sit down with them and say, "Let's look at the pros and cons of when you pull your Social Security and when you retire, and when you might refinance your home, and let’s see what is the best combination, the best timing of those things." They recognize that it's tax-free income from the home equity conversion mortgage and that's a big deal with taxes.
MARTHA SHEDDEN
I see that with Social Security. There are so many connected issues in the retirement planning space and it involves so many other professionals. It sounds like more financial professionals need to know about this. Do you reach out to financial professionals to educate them on this?
MARINA WATTS
I do. They also reach out to me as well when they hear about things, and will sometimes work with their clients together to come up with, “What would it look like if you didn't have this mortgage payment? Or what would it look like if you had the option to make mortgage payments, and some months you do and some months you don’t? What would it look like if in addition to your Social Security every month, you got a monthly check from the equity in your home? What would that look like? And the fact that the money's tax free, what does that look like at the end of the year when you're looking at paying taxes?”
MARTHA SHEDDEN
It all sounds so wonderful to me. I mention it to clients myself. But I often hear that they don't want to give up any equity in their home because they want their children to inherit that. Can you address that issue?
MARINA WATTS
I hear that a lot too. Frankly, I think it's becoming kind of an old school notion, this idea of leaving your house to your children. Now, if your house is paid off and you have sufficient income and tax planning where you want to keep your house free and clear and then hand it down to your kids, and you feel you can stay in that position, this may not be right for you. But I have so many clients for whom the world has really changed. Their kids have great jobs, and they're more concerned about Mom and Dad being okay in retirement, being able to stay in their home and having sufficient income to do that.
As I said earlier, it’s so common for people to have a mortgage going into retirement. So, if they were to pass away today, they wouldn’t be passing on a home that’s free and clear. They’d be passing on a home with a large mortgage that their kids would have to take on if they wanted the house. If you look at the full picture, it’s less likely for people to leave a house free and clear at a time when home prices are so much higher. The tendency to refinance and pull money out has become very common. Look at it this way. If you've ever refinanced your house with a traditional mortgage and taken a little bit of cash out, that’s really the same thing as a reverse mortgage. You just took cash out of your house.
MARTHA SHEDDEN
One thing we haven't touched on is the limit on your access to your equity. In some areas of the country home values have skyrocketed. Can you address that issue? How much can you have access to with a reverse mortgage?
MARINA WATTS
That's a great question. Home values have skyrocketed. People in California might think, “I have a $1 million home, give me $1 million.” But no lender is going to do 100% loan to value. As a rule of thumb, you’re going to be able to pull about 50% out of your home, so you need to have at least that much equity built up. So, just to use a round number, if your house is worth $400,000, you may be able to tap into around $200,000.
Now, the reason I can't give you exact numbers is because the three things that determine how much you can get are your home value and interest rates, which are changing every day, and the age of the youngest borrower. In other words, if you have a married couple and one is 65 and one is 62, the lender is going to look at the 62-year-old’s age to determine the benefit of the reverse mortgage. That’s because they look at life expectancy. Say you do a reverse mortgage when you’re 70, and your life expectancy is 85. They would look at about 15 years before they would get their return on their investment. If you're 62 and your life expectancy is 85, it's going to be a much longer wait.
MARTHA SHEDDEN
What about those who still have that mortgage they’ve refinanced multiple times? That gets paid off, I would assume.
MARINA WATTS
That’s correct. The way it works is the reverse mortgage has to be first as a lien against the house. So, if you have a current mortgage and did a home equity line of credit, and now you want to do a reverse mortgage, your benefit is first going to go toward paying off that mortgage and that line of credit, whatever the balance may be. We must completely extinguish any lien on the house, and then the reverse mortgage goes in its place.
MARTHA SHEDDEN
Along with our mortgage payments, we're paying taxes and insurance. Does the reverse mortgage include payment on those?
MARINA WATTS
If you have enough equity, you can request that the lender pay your property taxes and homeowner's insurance as part of the deal. But most of my clients do not elect for that. They want to take out the biggest amount in cash, and then pay their property taxes and homeowner's insurance and HOA, maintain their property on their own. That’s your responsibility in the reverse mortgage: pay your property taxes, homeowner's insurance and HOA, and maintain your home.
MARTHA SHEDDEN
You’ve covered so much information. Is there anything I haven't asked you that you think we should discuss, or is there anything you want to add to something you mentioned earlier?
MARINA WATTS
I think it’s important that we’ve covered so much about the flexibility in the program. It's a complex transaction. It's not how people are used to thinking of a mortgage. It's very individual. I would like to get back to the myths for a moment. People have it in their mind that this is for the little old lady who stays home and doesn't have any money. That couldn't be farther from the truth. I have very few of those types of clients.
I actually see more and more boomers. People in their 50s are calling me wanting to do it, because they have so much equity built up, and once they get educated about the product, they really want to get on board, but of course they have to wait until they’re eligible.
I would like to reiterate that there are many reasons and scenarios for people wanting to do a reverse mortgage, and many ways it can complement their retirement plan. There are many different ways it can be applied. In some ways, Social Security planning and tax planning are like the sisters of the planning of your home equity conversion mortgage. Some people might talk to someone like you and learn that it’s better to hold off on collecting Social Security, but they want to retire sooner, and now there’s a gap. We can fill that gap with the reverse mortgage income, maybe simply by opening up a line of credit where they’re not taking out huge chunks of money. It might be less money than when they were working, but on an as-needed basis. And what they’re taking out is tax free.
I encourage people to keep an open mind about reverse mortgages. There are plenty of people doing it in their early 60s as part of their retirement planning, and they're able to accomplish retirement goals they didn't think they could accomplish before. Some people think they’re too young to do this, but the fact is, the earlier you do it the longer you can benefit from it.
MARTHA SHEDDEN
Thank you, Marina, this has been very informative.