In this insightful deep dive episode, we unravel what some financial planners are dubbing the "retirement cheat code"—the reverse mortgage. Drawing from a compelling discussion with mortgage expert Ken Pitts, we demystify this financial tool that allows homeowners to access their equity without the burden of monthly payments. Discover how reverse mortgages can transform retirement planning, especially for those supporting aging parents or planning their own futures.
We break down the eligibility requirements, including age and property type, and explore three powerful strategies for utilizing reverse mortgages:
Eliminating existing mortgage payments to boost cash flow.
The delay bridge strategy to enhance Social Security benefits by borrowing against home equity.
A reverse mortgage line of credit that grows over time, providing a safety net without the risk of being called in by the bank.
We also address common concerns, such as property value fluctuations and the protections in place for heirs. This episode emphasizes that reverse mortgages are not just for desperate situations; they are a flexible financial tool that can be a valuable addition to your retirement strategy.
Key Takeaway: Use the insights from this episode to ask informed questions to your financial planner about how a reverse mortgage could fit into your financial plan.
Chapters:
00:00 - Introduction to Reverse Mortgages
02:15 - Understanding Eligibility and Requirements
05:45 - Strategy 1: Eliminating Payments
09:30 - Strategy 2: The Delay Bridge
15:20 - Strategy 3: Supercharged Emergency Fund
20:00 - Addressing Concerns and Protections for Heirs
The information provided in this podcast is for educational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any decisions regarding reverse mortgages or other financial products.
Episode 318
Transcripts
Speaker A:
Welcome to the deep dive.
Speaker A:
Today we're going to get into what some financial planners are calling a retirement cheat code.
Speaker B:
It's basically the opposite of how we all think about a mortgage.
Speaker A:
Exactly.
Speaker A:
We're pulling our insights from the about that Wallet podcast.
Speaker A:
Specifically, a really interesting talk with mortgage expert Ken Pitts.
Speaker B:
And our mission here is simple.
Speaker B:
We're trying to pull out the most valuable financial strategies, especially for, you know, anyone trying to help their parents or even plan for their own retirement.
Speaker A:
Right.
Speaker A:
And we have to say this up front, just like they did in the source material.
Speaker B:
Yes.
Speaker B:
This is all for educational purposes.
Speaker B:
This is just information to help you form better questions.
Speaker A:
So when we think mortgage, most of us think of a forward mortgage.
Speaker A:
That's the loan you get to buy a house, right?
Speaker B:
Right.
Speaker B:
You have to make those monthly principal and interest payments for, well, 30 years usually.
Speaker A:
But the tool we're really looking at today is the reverse mortgage.
Speaker B:
It's still a mortgage secured by the house, but instead of sending money in, you're taking that equity you've built and bringing it back out.
Speaker A:
And the biggest difference is no required monthly payments.
Speaker B:
None.
Speaker B:
The interest just gets deferred and it's added to the loan balance over time.
Speaker A:
So how does someone even qualify for that?
Speaker A:
It sounds a little too good to be true.
Speaker B:
Well, the qualification is surprisingly straightforward.
Speaker B:
It's not really about your income.
Speaker B:
You just have to show you can cover the house expenses, you know, taxes, insurance.
Speaker B:
It's a residual income calculation.
Speaker A:
Okay, so who's eligible for the FHA.
Speaker B:
Version, which is the most common?
Speaker B:
You have to be at least 62.
Speaker A:
Years old, and it has to be.
Speaker B:
Your main home, your primary residence.
Speaker B:
Yes, but that can be a condo, a duplex, even a multifamily home as long as you live in one of the units.
Speaker A:
Now, here's the part that really gets me.
Speaker A:
The borrowing limit.
Speaker A:
It's kind of backwards, isn't it?
Speaker B:
It is a little counterintuitive.
Speaker B:
It's based on your age, the home's value, and any debt you have.
Speaker B:
And the paradox is, the younger you are, say, 62, the less you can actually borrow.
Speaker A:
Why is that?
Speaker B:
Because the bank has to project that deferred interest potentially piling up for decades.
Speaker B:
So for a 62 year old, they might only let you access, say, 40% of the home's value.
Speaker B:
They're more cautious.
Speaker A:
Okay, so historically, these things had a really bad reputation, a last resort, a huge stigma.
Speaker B:
But financial planners are now looking at it as a really flexible tool.
Speaker A:
So let's talk about the strategies what's the first one?
Speaker B:
The simplest one is just eliminating payments.
Speaker B:
You use the reverse mortgage to completely pay off your old existing mortgage.
Speaker A:
And just like that, a huge monthly payment is gone.
Speaker A:
If you're wiping out, say a $1,200.
Speaker B:
Mortgage payment, that's a massive boost to your monthly cash flow.
Speaker B:
It makes your Social Security or other savings stretch so much further.
Speaker A:
I love that.
Speaker B:
Yeah.
Speaker A:
Okay, what's strategy number two?
Speaker B:
This is the delay bridge, and this one is really powerful.
Speaker A:
The delay bridge you use draws from.
Speaker B:
The reverse mortgage to create an income stre, bridging the gap from when you retire, maybe at 62, until you turn 70.
Speaker A:
So you're not touching your Social Security yet.
Speaker B:
Exactly.
Speaker B:
You let your Social Security benefit grow, and by waiting until 70, you can nearly double what that monthly check will be.
Speaker B:
You're borrowing a bit now to buy a much bigger guaranteed income for the rest of your life.
Speaker A:
Wow.
Speaker A:
And the third strategy you said, this one is like a supercharged emergency fund.
Speaker B:
It really is.
Speaker B:
It functions like a line of credit, but it's much better than a typical H E L O C. How so?
Speaker A:
Because a heloc, the bank can call that in.
Speaker A:
Right?
Speaker A:
Or just freeze it.
Speaker B:
Precisely.
Speaker B:
The reverse mortgage line of credit cannot be called in and you never have to re qualify.
Speaker B:
And here's the amazing part.
Speaker B:
If you don't use it, the available credit line actually grows every year.
Speaker A:
It grows.
Speaker A:
So you have access to more equity down the line.
Speaker B:
Yes.
Speaker B:
Tax free.
Speaker B:
It's an incredible hedge against, you know, living longer than you expected.
Speaker A:
That's amazing.
Speaker A:
But we do have to talk about the elephant in the room.
Speaker A:
What happens if the property value drops?
Speaker A:
Are the kids on the hook for a huge bill?
Speaker B:
That's the most important protection.
Speaker B:
The FHA version is a non recourse loan.
Speaker B:
Your heirs will never, ever owe more than the home is worth when it's sold.
Speaker B:
The loan gets paid off from the sale of the home and that's it.
Speaker A:
And when does it have to be paid off?
Speaker A:
What are the triggers?
Speaker B:
There are three main.
Speaker B:
The borrower passes away, the house is sold, or the borrower moves out for more than 12 months, like into a long term care facility.
Speaker B:
Oh, and of course you have to keep paying your property taxes and insurance.
Speaker A:
So the big takeaway here for you is that the reverse mortgage isn't just this thing for desperate situations.
Speaker A:
It's a really flexible financial tool that should probably be in the toolbox.
Speaker B:
It really should.
Speaker B:
Which brings us back to that great quote from Ken Pitts.
Speaker B:
He said the Internet is a great place to form questions.
Speaker B:
It's not always the best place to get answers.
Speaker A:
Use what you heard here to go ask your financial planner some really smart targeted questions.
Speaker B:
Absolutely.
Speaker A:
And if you found this deep dive useful, please take a second to leave us a five star review.
Speaker A:
Then go listen to the full conversation on the about that Wallet podcast.
