Ep 053 - Reverse Mortgages Explained: Myths, Truths, and Real-Life Uses

Welcome to Be a Smarter Homeowner Podcast, where you'll discover strategies to save money, save time, and be better organized in managing your largest financial asset and biggest expense, your home. Your hosts, John Bodrozic and Beth Dodson, who are co-founders of HomeZada, have been supporting homeowners for over 20 years. They are here to share with you their tips and suggestions, as well as interviews with industry experts. With the goal of helping you become a smarter homeowner. Now here's your hosts, John and Beth.

Hi everyone, I am Beth Dodson. Welcome to Be a Smarter Homeowner Podcast. Today we've got all things reverse mortgages. I know there's been some misconceptions. With us is our guest Laura Phillips, who is a licensed reverse mortgage specialist. She's over 25 years experience in real estate lending, dedicated to guiding clients through HECM and reverse loan process to ensure they make the most informed financial decisions. And we are going to get into what HECM is, but let's get started. Laura, welcome to our podcast.

Thank you so much. I am so happy to be here today.

Yeah, so for— so let's just get right into it. For listeners who are not familiar, what exactly is a reverse mortgage?

Absolutely, Beth. HECM stands for Home Equity Conversion Mortgage.

Beautiful.

A lot of words. And so we call it a HECM, so it really sounds like you're coughing up something, which is really a horrible acronym, but they are called HECMs. Most people use the reverse mortgage word, but the official is the HECM, and that is a HUD product. It's out for people who are 62 and older. However, there is a proprietary loan out there now that is also a HECM-type loan, and it goes down to 55. So, a lot of opportunities.

And then, so what typical homeowner would use a reverse mortgage? I mean, what situation would they have to be in? We now— we've got age, but what situation would they have to be in?

You know, I see it across the board in almost Okay. A myriad of situations from being financially strapped, which is, I think, most people's concept is you only get it because I can't make ends meet. And I certainly see that, that's out there, and there's no, there's no crime or shame in needing that. None of us have ever thought about saving for the next 30 years of retirement. So that's definitely one of the uses. I see a lot of uses in putting a line of credit on and only using it for emergencies so that they They don't go and sell assets, particularly when the market's not doing very well.

Totally.

So that, you know, because those are also hard-earned assets and sometimes take longer to recover. I've seen it— people buy reverse mortgages— or not buy, but get reverse mortgages to help a family member, particularly a younger, like a junior, a high school student who's really excelled, good in school, has been accepted to a good college, but the parents didn't save for that kind of college education. I've seen grandparents step in and say, let me help the next generation. So I think whatever your need is, is out there and you can use it.

So that's wonderful. So it sounds like some of the options are, if you are in a position to take a reverse mortgage, you can use it basically not only to help the next generation, but they don't have to wait until you pass away To reap the benefits of the inheritance that you may be trying to give them.

Absolutely.

Oh my gosh, that's fantastic. I love this. So, um, one of the questions I have is, because I love this conversation and I had my own misconceptions of a reverse mortgage until I sat in a conversation. I wanted to learn. I had to go in with an open mind, and I actually realized that there's a lot of benefits But what are some of the misconceptions that you are hearing about as it relates to a reverse mortgage?

Well, I think they're still out there. In fact, I met a couple yesterday and the husband, arms crossed, you know, he said, okay, I've heard that these are really bad loans. And I said, well, they have a reputation. I'm not going to lie. Let's just talk about those elephants out there. And when they first came out with the reverse mortgage, there were a lot of things they didn't think about, and one of them was putting the wife on the loan or the significant other, the younger significant other, we'll put it that way, not necessarily the wife, but the younger mate or significant other. And so when the only older person was on the loan and passed away, that partner was out on the streets due to a foreclosure. They had no home to live in. Huge. So you would see grandma, grandma was on the street, she had nowhere to go. Well, they have fixed that. It's been fixed for quite a long time.

Okay.

One of the other things is, is it is costly. I'm not going to lie about that. We talk about the cost and why it's There, and it's not a loan to follow down interest rates.

Sure.

I think we're all used to that. You see, if the interest rate goes down 2 points, let's, you know, our hands are up, let's get a refinance, we roll in the cost. Well, this is a costly loan, and it does need to give some thought to it. I think it's timing for everyone, but I'd say those are the 2 big things that you hear, are the cost and that people get foreclosed on. And that can happen, but you have to not have paid your property tax. Or, or lived in the home. So there are a couple reasons, and usually that's not part of the story when somebody says so-and-so got it closed.

Okay, and so let's talk about some of the costs. I'm assuming these are closing costs to secure this equity line of credit, because that's kind of what it is— equity reverse mortgage line of credit.

It is actually an equity, correct.

Yes, and so the closing costs, a lot of people are not prepared for. Is there Are there other additional costs above closing costs that may occur?

No, it is the closing costs. In particular is the mortgage insurance. It is a HUD product. And so we all think about mortgage insurance and we didn't have 20% equity, and that's true, that's a mortgage insurance out there. For some reason we're using the same term, but this particular form of mortgage insurance is to protect the heirs and the borrowers from ever having anybody come and say you owe more money if the house is worth less than the loan. So think back to 2009 and '10 and the foreclosure years, and you had people getting notices in the mail saying you owe X amount of money because the house was less than the loan, we want to recoup it. That's not going to happen on a reverse mortgage, and you do pay for it. It is an expensive insurance— it's an insurance form and it is expensive.

It's a— it's, yeah, another product, an insurance product that you have to leverage. But But oftentimes, to your point, usually mortgage insurance is required by certain federal agencies, etc., like HUD, in order to do this. Okay, that makes sense, but it does protect the home. So even though there's an expense, it protects it for future generations.

It protects the future generations from having to dig into their pocketbook to pay it off. And absolutely, it is a requirement of the HUD product, the FHA/HUD reverse mortgage. Now, the proprietary The secondary loans don't have it. Their trade-off is that their interest rate is probably about 2 points higher than what you would see in the market. So they, you know, there's a trade-off, you know, and that seems to be the big way to see it.

That's the big word we always use in this podcast is trade-offs. There's always trade-offs with everything in your home. So once people choose to get a reverse mortgage, How do they access the funds?

Well, we're not— this was the other big misconception with this couple yesterday. This is good because I can really think back on the 2-hour conversation I had with them yesterday. They thought that they have a lot of equity in their home. They have a very, very low mortgage balance and a home worth close to $1 million. So a lot of equity involved. And they thought they could tap maybe 80%, 90% of it, which is not true for any loan out there, to be honest with you. I mean, you can. But again, you're going to pay for it in interest rate and mortgage insurance. HECMs are only— they're only going to allow you to get a certain amount out. And I talk to people about there are 3 gears that calculate how much equity you can actually be able to access.

Okay.

And one of them is age, the other one is the value of the home less the loan, and the third one is the interest rate. So they all kind of turn together and then they kind of spit out a number. In that particular family's case, it was about 45%. So that was like, whoa, you know, we were thinking $800,000. I'm thinking, no, no, it's not out there. So that's, that's probably the biggest thing. But once you get that number, you have access to it. You can get it in a lump sum with some products. You can get it in a line of credit with other products. So you can use it as you need. You can even— excuse me, this one I don't see used very often, but it's really kind of exciting— is you can get it as a 10-year payment, like your Social Security payment.

Yeah.

If you just need extra funds, to come in, you know, you could say an extra $1,000 is a huge raise in everybody's pocketbook.

Yeah, totally. And so, um, and I know neither one of us are tax accountants here, but I just happened to talk to somebody about this. Is this taxable income if it does come in?

Okay, so I will give my disclaimer also.

I am not a tax professional. We are not.

However, my understanding is, is that if you borrow on your equity of a home, and I think most of us in our lifetime probably had or will consider getting a traditional HELOC loan, home equity line of credit, from a bank. It is not considered taxable income. It is considered taxable income when you sell the home and you get the lump sum. And again, please talk to your financial advisors and your people. Please, please, please do that.

Exactly, because every state, county, city, whatever, has different rules. So please, we're just Asking questions just to have some framework here. So now that we know what it is and people can take money against it, so do the homeowners still own their homes when they leverage a reverse mortgage? This is a big question, I think, a misconception that people go, oh, then it's not mine anymore.

It's a loan. It's a loan like any other loan that you've ever done on your home. And I think there are a few people that have paid cash, but it is still a loan. And so you still are entitled You're 100% entitled. The lenders do not want to be entitled on your home. They don't want to own your home. They want to lend a loan to you that you pay back. Now, the interesting thing about reverse mortgages is that you don't have to make a monthly payment. It's not required. And, you know, and so that's, that's where I see people— you actually can see shoulders kind of drop, like that sigh. Yeah, I don't have to make that payment anymore. No, you don't have to if you don't want to.

So, okay, so that's interesting. So, um, I have 2 questions related to that.

Sure, go ahead.

The first one is, because it's money coming in, homeowners— and to your point earlier, homeowners can use it for paying someone's education, any healthcare bills— can they use it to buy another, like, home? Can they use that fund for anything?

They can buy a second home with it.

Yes.

Okay. Yeah, they can buy a second home. Um, I've heard of people Younger seniors that wanted to make a family retreat and bought a beach house, and they, you know, they used it during the season and they would have everybody come and stay and develop family memories. So absolutely, the HECM or reverse mortgage, regardless of whether it's a proprietary or the government one, the HUD one, requires you to live in the home. You have to make it your primary home.

Okay.

Now that doesn't mean that you can't buy a second home in Arizona. I live in Colorado, so you You know, most people this year, we didn't get any snow, but most people don't want to be around the snow.

Correct.

And they're perfectly happy to go anywhere where it doesn't snow. So you could have a second home anywhere and enjoy it and then come back to your home during the months that you enjoy.

Oh, perfect. And then my next question based on all of this is, okay, so what happens when a homeowner passes away? So, because it's at a certain age and we, for everyone on the call or what have you. We all die, unfortunately. We all die in this lifetime, and what happens to that?

2 things. If you have a significant other or a spouse and both people are on the loan, then nothing really changes for the remaining partner. You can still have access to the lines of credit. There's money there. You can still continue to live in the home as long as you pay the taxes and insurance, you enjoy the benefit of being there. If it's just one party that was there, or all parties are gone, in either case, then the home is— comes— becomes due and payable. The loan comes due and payable at that time. And there are a couple of options. If it is— still has great value in it, the heirs have the opportunity to sell it, pay off the loan, and recoup the funds that are left over for them as part of their inheritance.

Okay.

If the home is worth less than the loan. This is where that mortgage insurance, that expensive piece of insurance that's there, comes into play. And they say, great, no fault, no crime, no harm. Here are the keys. The heirs give them the keys and the lender takes over the home.

Yeah, but that's— so that's really a brilliant concept because the— basically, and I'm just envisioning like elderly people. Like, and I'm just thinking, like, my mother-in-law is 91 years old, and if ever she needs— oh yeah, she's doing great. If ever she needs additional income, she can always use a reverse mortgage to basically age in place in her home because she loves her home and she's completely— she can walk it, she can clean it, she can do all these things. But there comes a point in time when you age I'm a firm believer certain people should not be on ladders anymore, and so cleaning your gutters needs to be outsourced. They need to be outsourced. And other tasks may need to be outsourced, but you never prepared for that income. You can use this reverse mortgage to give you that supplemental income to help pay for all those other resources that you may need as you age and you choose to stay in your home.

Absolutely. I have a gentleman, he's passed since now, or since the loan started, but we did it and the last year of his life the home was free and clear. He had spent down his assets, the children were fine with that, and he was paying for home care, 24-hour home care.

Okay.

And so we used the reverse mortgage to do the rest of that, and he happily did exactly what he wanted to do. He died in the home. The home care people were there the whole time, and it wasn't a debt or a worry for the children to try to figure out how to help pay that to support the parents' desires to do that. And in the end, there were some funds left over. The kids didn't want any funds. They just wanted mom and dad to be comfortable and, and to get the best care they could. So they used it.

Yeah, that's brilliant. And I— the reason it's so brilliant is parents of a certain age can be proactive about not burdening their children with those type of healthcare expenses or home care expenses, and the children have less stress on them. Right.

Get to enjoy mom and dad in those last years.

Yes.

And it can be stressful. I mean, you are— there are sick, and you know that, and you're seeing that, that weigh on them and their mental and physical capacities. And so, so much of them are relieved to just be there and be with them instead of thinking, oh, how are we going to pay for this person to come in? Do I have to do it? Do I have to take the midnight to 6 shift? And, you know, who's going to take care of the kids in the morning? And yeah, it's just a huge, huge relief for the family.

Oh, it's lovely. It's beautiful, actually. Like, I'm thinking how beautiful this process is for people who choose, who choose it, who may need it. Like, glorious.

So, and they can prepare the house to age in it, you know. Maybe you need grab bars and maybe you need a ramp to get in. You don't need it just because you're on the last, you know, quarter of your life or months or weeks. You can use it to age comfortably in your home. And pay for that work to be done.

Yeah, and I can even see, like, even some people, unfortunately, they may need wheelchairs as they get older, or walkers, and some of their hallways and some other areas are not equipped, and something has to get changed physically as to the structure of the home to make that happen.

Oh, that's beautiful.

That's amazing.

It's a great product. It really is.

So So we, we are listening to some of the ex— the examples of how people are using a reverse mortgage.

Yeah.

Buying second homes so they can be snowbirds, live somewhere where it's warmer in certain parts of the year, build family memories. They can use it for aging in place, paying services people, both medical or home services people. They can use it for education for other family members. Are there other things that you're seeing that your customers are using reverse mortgages for that may be unique that no one's ever thought of? Because even home care, I think, is fairly unique.

Right, right. I can tell you about my very first, first mortgage because it really sticks in my mind. I've been doing them steadily— this is the only loan I do now— for about 10 years, but this was very odd. early on in my mortgage career, and I had a gentleman call me, and he wanted to put a reverse on the house. He felt like he had plenty of funds to live. His wife had been diagnosed with an end-stage life illness, and— but she was still doing okay, and he wanted to put a reverse on to be able to give her a trip around the world. Oh, and build those memories. It gives me goosebumps. It still gives me goosebumps. Isn't that lovely? Love it. He wanted to give— he loved her desperately, and Was so sad he was gonna lose her, but to travel to Europe and to Fiji, I mean, they literally went around the world while she was still spry and able to do things. And it was the gift of love.

Yes.

It was truly the gift of love.

Yes.

So I really think whatever you want to do, you can. It's your money.

Yes.

Let's go back to the basics. It is your money. It's your equity. You can do with it what you want.

Oh, that's lovely. That's beautiful. That is a glorious story. So here it is, we were talking about some of the practical things, and this to some may not be practical, but it's just building those last end-of-life memories that oftentimes you don't think about. Oh, lovely. Like, that is just making my day. If you don't— if you want a reverse mortgage, now's the time. Look.

Yeah, it may— I mean, I still get goosebumps. And that's been probably 25 years. It's been a long time since I had that first call, and I didn't know much about them back then. I said, sure, I'll help you, I'll figure it out. And I love it. I think it's, it's a misunderstood product.

Yes.

And I truly believe that every senior should consider it. Doesn't mean they have to do it, but they should consider it in their lifetime and figure out where it works.

And speaking of considering it, What do they need to— what is it that people need to think about, or decision criteria do they need to think about before they make this decision to choose a reverse mortgage?

Well, I started, you know, I've been doing this for a long time. Obviously, I've been doing loans for a long time, 30 years, and I have found that the use of equity has changed in our lifetime, whether we are a young couple or an aging couple. We are looking at equity and using it differently. So I actually started a thought process called the Equity Shift, and it's to think about what do you do with your equity. You know, the old thought pattern was pay it off and I guess leave the farm to the kids.

Yeah.

And that's not the case as much anymore, but if you truly want to leave the house to the children or the grandchildren Then the reverse mortgage is probably not the product that you should use or even consider. But if you don't think about that when you're talking about getting it and having those discussions with your family members, it could be a surprise that's not going to be, you know, maybe not be a very pleasant surprise.

Right.

So think about how you want to use your equity. It is in your walls. It's hard to get out. Reverse mortgages gives you the best opportunity to get it out Without costing additional monthly debt to you. It is a debt, but it's not a monthly debt in the sense that you have to pay it. And how would you like to use it? What, you know, how do you want to make it work for you? Let that equity work for you.

Yeah, that's beautiful. That is lovely. And then to your point, I'm a firm believer as being upfront when it comes to estate planning and your heirs because Yeah. The back end can be negative if not prepared properly. So if you choose to take a reverse mortgage, and I, I think you're saying the same thing, recommend have the discussion with your heirs saying this is something that I've taken on. So if you expect to make all this money off of this property and that's all you think you're going to do, you may have to take another look at what the inheritance structure is.

Right. Yeah, it's just gonna be less because they're using the equity now. I did have one family member that did talk to the kids, and the oldest— the husband died and she was there, but all of a sudden the kids were like, oh wait, there's a loan on this house, and they had said it was okay. It was, it was disheartening to, to go through that process. The kids had said it's okay. So sometimes, I mean, I'm happy— for me, as a lender, I am happy to have your financial advisor sit in with me, your estate attorney, your children. It's really a good conversation to have with the family and all parties.

Yeah, so that's a good point. If you can bring— if you choose this method of reverse mortgage, Then bring in the appropriate individuals so they understand what, what the outcomes will be once the, the next phase of life happens.

Right, right. Absolutely. It makes that transition easier. That was not an easy transition, let's just put it that way.

Yeah, no, and believe you me, I have friends that are estate attorneys. They tell me there's a lot of crazy that can happen if there is not clarity upfront.

Yes, conversations. It's a great— it's conversation. And to be honest with you, we don't talk about death, you know, death or taxes, as my mother used to say, but we don't talk about that much, and we really should. We should talk about, oh yeah, what end of life looks like, what are your desires and plans. And, you know, it's not just about reverse mortgages. It is really just acknowledging that We, you know, there's phases of life, and that seems to be the one that a lot of people don't talk about.

Yeah, and I think there are some components of, but, but wait, wait, they're in denial of dying. And I go, we all do it, people. We all do it eventually.

My parents were, yeah, they were good examples of we just thought we'd live forever, and here we are. Yeah, absolutely. So no plans. Exactly.

So on the side note, for anyone out there, it's never too early to start planning on estate planning. I've been doing it since I was in my 30s. So yeah, yeah, it's just— and you know what happens is like these life events happen that force that process. And but even if it didn't, I would literally have still done it. And I was like, yeah, because I want clarity. And my husband and I want slightly different things as well at the next phase, but hey, it's also important that people understand that. And I was like, okay.

It is important that people understand it. And so, you know, you don't— that's not when you really want to have those conversations regardless. You know, we got through it with humor. We got through it with humor. But yeah, it was— I try now because I have Children that are in their late 50s and 30s, and I do want to make sure they understand what my wishes are.

Of course.

And dad's wishes. You're right, my husband's wishes are totally different.

Correct.

You know, so let's kind of get on some kind of page together.

Exactly. And that's not uncommon that all the wishes are different, people. Just a side note. It's not uncommon.

Oh, is it? Okay, good to know.

It's not uncommon. So, Laura, this has been so amazing. This has been such— it's one of the things I like about this conversation is it's been educational, but it's also been graceful for—

Thanks.

Yeah, for those people in understanding what their options are, and I think that's really important. It's been so sweet, like even with your note about the customer who decided to take their wife on an around-the-world trip, like, beautiful, beautiful gift. But tell people how they can find you. Well, before we get there, is there any last thing you want to talk about as it relates to reverse mortgages, or have we covered a lot?

We've covered a lot. You have been a great host to talk about.

Thank you.

Great, great questions. I think, Beth, you know, like I said, it's a conversation I think people should have. As I said earlier, I think it's, it's something to consider, talk about. Don't be afraid of it. Do find somebody that you're comfortable to talk with. You know, like doctors. There are doctors you can relate to, and there are doctors that you go in and you feel like you're a child being scolded in the corner or something. That's a good point. That's the same thing for lenders. Find a lender that does reverse mortgages and kind of does it more as a full-time job and not a side gig, so to speak, and have conversations. I mean, I spent 2 hours with this couple yesterday just talking, and They have to go home and think now about what is it they really want to do. I mean, I personally am not, let's hurry up, hurry up and get this done. This is, in my opinion, a conversation that needs some thought and some consideration.

Yeah, it's brilliant. I agree with you 100%. Now tell people how they can find you.

Absolutely. Well, I'm licensed in 3 states right now: Colorado, which is my home state; California, And Florida, and you can reach out to me by my telephone number. I answer it. I don't have an answering service. It's me, and that is 303-817-4611. That's a Colorado number. And I also have a website with my name, lauraphillips.com, and Phillips is P-H-I-L-L-I-P-S. So I'm out there. You can reach out.

Perfect. Thank you so much for Thanks, Laura, for being a guest today on Be a Smarter Homeowner Podcast. And if anyone who's listening or watching thinks this is of value to anyone you know, please forward this to all those individuals. Like, subscribe, you know the drill. But for everybody else, thank you. We look forward to seeing you on the next episode of Be a Smarter Homeowner Podcast where we talk all things home. Have a great day.

Thank you.

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