By Mark Schumacher, NMLS ID 519754; Mutual of Omaha Mortgage, Inc., NMLS ID 1025894
About 10 years ago, I met with a retired couple. They’d heard about a purchase-money financing tool we offered for primary residences, and they wanted more information. I explained to them how the program works, which included these key points:
- They can buy a $600,000 home with $375,000 cash down and have no monthly mortgage payments for as long as they live in their home.
- The borrowed money accrues interest, which gets added to the loan balance each month.
- They are responsible for paying property taxes, homeowner’s insurance, and maintaining the home.
- They own the home; the lender does not.
- The mortgage comes due or matures once neither of them is living in their home. That’s when the principal and accrued interest are repaid, typically from the sale of the home.
- The sale of the home pays off the loan; the estate gets the remaining equity.
- The estate can keep the home by repaying the loan by some other means if they wish.
At the conclusion of our meeting, the husband said, “This is so much better than reverse mortgage.”
I asked him why he said that. After a few seconds, he responded, “Well, with a reverse mortgage, you give up the house…don’t you?”
After clarifying for him that reverse mortgage borrowers are still the owners of their home, he said, “I guess I don’t really know what a reverse mortgage is.”
That was an “Ah-Ha” moment.
This purchase-money program came out in 2009. We call it Lifestyle Home Loan. It’s a type of reverse mortgage for home buyers age 62 and greater.
The traditional reverse mortgage is for homeowners wanting to stay in the home they are in. It lets them use some of their equity without having to make monthly payments on the money they’ve used. This frees up cash flow in at least one of several ways.
If they have a mortgage, we have to pay it off when we close on the reverse. Additional money they qualify for can be accessed in several different ways, including cash out at the start, monthly payments, and a line of credit.
An often-used strategy of homeowners with a small mortgage or none at all is to establish the reverse line of credit so that when a spending shock happens, they have a ready source of tax-free cash they can easily get their hands on. That’s helpful for people who don’t have other sources of cash to access or people with portfolios they don’t want to touch at the time.
The line of credit is also nice to have available in case it’s needed for unknown future healthcare needs. Long-term care services cost a lot of money. Establishing the reverse mortgage line of credit early allows the homeowner to leave the line of credit alone for years, which allows the line of credit to grow into significantly more money than was available at the start of the loan.
Think about when you started saving for retirement. Whatever age it was you started saving, most people wished they’d started saving earlier. That’s kind of what this line of credit is like, but for the house asset.
The traditional reverse mortgage is an FHA loan. There are also proprietary reverse mortgages. These typically have lower closing costs, higher interest rates and provide more money to the homeowner than the FHA option, as well as a much higher lending limit. Sometimes they allow the borrower to be as young as 55.
There is one other reverse mortgage that gets special mention because it is unique from all the others in one particular way. It is a second-lien reverse mortgage.
Someone with a mortgage they are paying on might qualify for the second-lien reverse and borrow reverse money on top of the first. In other words, they continue making the payment on their first mortgage but don’t have to make payments on the second-lien reverse money they received.
I have clients with a first-mortgage interest rate under 3% that they didn’t want to mess with. They also had a second-lien home equity line of credit (HELOC) with a higher interest rate. They wanted to get rid of their HELOC payment, so they used the second-lien reverse to pay it off.
The house asset is a funny thing. Most of us invest most of our money into our home. Yet, instead of strengthening our cash flow throughout our retirement years, that asset continues to consume our remaining sources of cash flow.
It doesn’t have to be that way. Not only is the house the shelter over our heads, it can be like the bank down the street. There’s money in those walls. A home is a quality investment that can provide for quality of life when we most need our assets working for us—our golden years.
