Is A Reverse Mortgage Good Or Bad And How Does It Fit Into Your Retirement
There's always been a lot of negative connotations surrounding reverse mortgages, so in this
video, I'm going to talk about the pros and the cons and just the basics so you can understand
how they work and if it's a possible fit for your retirement.
Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group, host of the retirement income show,
certified financial planner, professional and certified tax specialist. When we talk about the
reverse mortgage, there-- as I said-- has always been a lot of negative connotation.
But there's also a lot of misconception out there. Just like most things in the financial industry,
it's neither good nor bad. It’s just it is what it is. It's a tool. It's something that possibly you could
use. You could have in the tool belt, so to speak, of your retirement arsenal. And if you
understand the pros and the cons, you can decide for yourself if it's something that can benefit
your retirement, or maybe not.
So the basics here, you have a home most likely that you've paid into over the years. You've
paid down the debt, the mortgage balance. You could have no balance. You could also have a
mortgage still left on your primary residence (while) entering into retirement. Whatever the case
is.
Let's say your home is worth $600,000. You have to have a certain amount of equity. You can't
do this with no equity whatsoever. Let's say you've paid off the home entirely and you have no
balance in this first example. You can have a payment or you can have a choice.
You can either do a reverse mortgage, which simply means you can turn the equity in your
home and receive either a Monthly Payment or a Lump Sum of cash. One other option here is
to do a Line of Credit.
A $1,500 a month income, which is 100% tax free, by the way. This is a hypothetical number,
but let's say approximately $1,500 a month. You could have that as an income stream to help
supplement your Social Security, your investment portfolio, your IRA withdrawals, or you could
take a lump sum.
Let's say, it's $300,000. Again, that's about 50% of the equity of the market value of your home.
You have to get an appraisal. And there are interest rate costs here and origination fees and
there are some expenses. But generally speaking, your home has a certain value. You can
receive a monthly payment or a lump sum or possibly a line of credit. If you need to access that
money, you can. And these are just 2 examples.
Theoretically, maybe it's $1,500 a month or a lump sum of $300,000 or it's a line of credit. Big
one here. You don't have to make payments. If you do a cash out Re5, for example, or if you
just borrow money out of the equity of your home, you have to make payments on that loan with
a reverse mortgage. You don't have to make any payments. And because it's a loan, again, it's
tax free. So this is a tax free supplemental source of retirement income.
One of the big misconceptions I've always heard is, “well, Troy, the government can take your
home” or “the bank can take your home”. Technically, yes, they can. But only if you do not pay
your property taxes, you do not pay your home insurance and you do not maintain the home. If
you can pay your property taxes and pay your home insurance and maintain the condition of
your home, you're guaranteed to stay in the home for as long as you live. It doesn't matter if you
live to be 80 or 180. You can live in that home as long as you pay these property taxes,
insurance and keep up with the maintenance.
Now, upon death, this is another one I always hear: “Troye, upon death, well, my kids aren't
going to get anything”. Well, that very possibly could be true.
Let's look at this example. Let's say the home valued at $600,000 is growing at 2%. And you
have a reverse mortgage. You take the lump sum at $300,000 at 5%. One thing real quick to
note, the interest rates you're going to pay on a reverse mortgage are typically going to be
higher than the rate you may get on a primary residence loan. So if you can go out in today's
low interest rate environment and get a 3% loan on a residence that you're going to live in, if
you do a reverse mortgage, it might be 5%, it might be 6%.
But remember, you don't make any payments. What happens is this interest accrues over time.
You don't make any payments to the bank. But in this example here, the home is growing at
2%. The reverse mortgage is growing at 5%.
Let's say this is an end run. These numbers, as far as the time value of money calculation, is
just a basic example to understand the concept. But let's say the home down the road 20 years
from now is worth $700,000.
The reverse mortgage has grown from $300,000 to $500,000. Maybe it's $600,000-- whatever
that number is the difference between the two. When you pass away, the bank is going to sell
the home, pay off the reverse mortgage. And if there's anything left, it will go to your heirs. If
there's not anything left, your heirs are-- If you're underwater, there's no liability. So (for
example,) the reverse mortgage grows to be $900,000 and the bank sells the home for
$700,000, there's a $200,000 underwater gap there. Your children or grandchildren are not on
the hook for that $200,000. The bank simply eats it.
How does this fit into Retirement 360? Just to refresh, our Retirement 360 process focuses on
risk management and an investment plan. Those two go hand in hand. Income Planning, Tax
Planning, Health Care Planning and an Estate Plan. As far as risk and investment management,
I would never want someone to do a reverse mortgage and take that money and invest it.
The costs are simply too high. Again, the rates cost more than your traditional market rates for a
primary residential loan, plus you have origination fees and some other costs. All those get
wrapped into the reverse mortgage and they're paid upon death as long as you can pay your
property taxes, homeowner's insurance and maintain the home. But let's say, you're dependent
on your portfolio for income and the market crashes. You're 79, you’re 86, you're 91 years old.
From a risk management perspective, maybe if we have a line of credit with the reverse
mortgage, instead of having to sell stocks when the market is down, we can go into the line of
credit, get a tax free loan from that reverse mortgage, and that can help buoy the portfolio to a
certain extent by not having to withdraw from it. So as part of a risk management strategy in
retirement, that's one way reverse mortgage could benefit you from an income planning
perspective.
Obviously, it's pretty simple. You can get a monthly income, you could take a lump sum, take
income from that, whatever you choose to do. That's pretty self-explanatory from a tax
standpoint.
Let's say taxes go up in the future. You can take this money, whether it's the monthly payment
or a lump sum, it's all tax free again. So it's just another bucket. It's another choice. It's another
option where you can subsidize your lifestyle through the equity in your home on a one hundred
percent tax free basis. Health care, again, pretty self-explanatory if you have a big health care
expense, if you have some unexpected need, you can take that money tax free to pay for your
health care. And finally, estate planning, the last step of our Retirement 360 financial planning
process.
When it comes to the reverse mortgage, when you have access to a large lump sum of money,
it gives you a ton of flexibility for planning strategies. Right now, it's up in the air whether the
home that you pass on to your children will even be tax free, because we could lose that step up
in basis with the pending tax legislation. The secure act require IRAs to be distributed within 10
years when your children inherit them. So possibly we use this lump sum or the monthly
payments to start paying taxes on those now, depending on their situation and your situation.
At the end of the day, estate planning is a lot more than just having your wills and your trust in
those documents. It's how do we come up with the plan to get the money that you save most
efficiently and with the least amount of headache and taxation to that next generation. So this
can work into an estate plan as well.
This is why the Retirement 360 process, as we go through this with our clients, these are all the
big points. Do you have enough? Can you retire? How do you pay less tax in retirement? Will
your spouse be okay if something happens to you?
All of these different elements tie into Retirement 360. The reverse mortgage is simply one tool.
It helps to understand the pros and the cons. I'm not recommending reverse mortgages. I'm not
saying it's something you should do.
I just want you to understand the benefits and the downsides, the cost associated with it, and
reach out to a mortgage broker or someone who specializes in these reverse mortgages if you
think it could benefit your situation.
If you liked this video, make sure to hit that thumbs up. If you don't like the video, hit the thumbs
down, that's fine, too. Of course, subscribe to the channel. Hit that little bell icon. Share the
video with a friend or family member. And we would love to hear your comments (if you've had a
reverse mortgage, what your experience has been) down below. And if maybe you've thought
something about reverse mortgages that wasn't true that we've dispelled in this video,tell us
about that in the comments down below also.
Thanks for watching. And I look forward to seeing you on the next video.