It’s Just a Mortgage

Misinformation is rampant in the world of reverse mortgages. All you need to do is Google "reverse mortgages," and you will see so many articles and posts that it will make your head swim. Over the past decades, only a few financial products have evolved and improved more than this one, but that sure doesn't get headlines and clicks online; good news usually doesn't. 

With so much to share and limited space for our discussion, I want to focus on what I see as the most important pieces of misinformation. First, I start every conversation with someone inquiring about reverse mortgages by saying it is "Just a Mortgage."   That's right. The only difference between a reverse and a traditional mortgage is that you don't have to make a principal and interest payment unless you decide to. There is no obligation to make a payment!  

Under the umbrella of "It's just a mortgage," did you know that a reverse mortgage offers flexibility? You can choose to make payments, refinance for better terms, or even use it to purchase a new home. This adaptability makes a reverse mortgage a versatile financial tool, putting you in control of your financial future.  

Another common misconception is that the bank or lender takes ownership of your home in a reverse mortgage. This is not the case. In reality, a reverse mortgage functions much like a traditional mortgage. It places a lien on your home, which must be repaid when you sell the house or if you move out in the case of a reverse mortgage. You retain ownership of your home. 

Let's discuss the most often-used strategy with those two key concepts out of the way. It is estimated that 70% of reverse mortgages originated to eliminate the need to make a mortgage payment, i.e., freeing up monthly cash flow for the household. Many retirees today face a monthly shortfall or a very tight budget while sitting on a large amount of home equity.    

Case Study #1

A recent client of mine was precisely in this situation.  A healthy 80-year-old woman was coupon-cutting and living exceptionally frugally while seeing her investment account dwindle.  She had $1.3 million worth of home equity yet was required to make a $1500 monthly mortgage payment.   Her kids strongly desired her to travel and enjoy her retirement, so we discussed and eventually helped her complete a reverse mortgage transaction, which enabled her to eliminate the payment. At the same time, we also opened a line of credit she could use for her travel.  This improved her household cash flow while giving her access to money without continuing to draw down her investments.

Case Study #2

A widow had a home that was too big for her, and she wanted to downsize while moving closer to her children and grandchildren. She was also running out of money in her investment account, even though she had over $1.5 million in home equity. The home was paid and mortgage-free.

So, we helped her with what the industry calls the "Move Down" scenario. First, she sold her home in the Los Angeles area, which netted her $1.3 million after taxes and expenses.

Her next step was to buy a smaller condo in the desert for $700,000, and she used a reverse mortgage to finance a piece of this transaction. The mortgage was for $280,000, so she used $420,000 of her sales proceeds and then funded her investment account with a balance of $880,000.  This strategy enabled her to buy the home she wanted with no mortgage payment, and her retirement account was funded, allowing her to enjoy the rest of her life!

This was a truly impactful event in our client's life. As living costs continue to rise well beyond social security, pensions, and savings, we will see more of this in the coming months and years.

Remember, "it's just a mortgage".

Daniel Williams is a Certified Reverse Mortgage Professional with almost 20 years of experience in the residential lending industry and co-author of two books.  Daniel is with C2 Financial, the largest mortgage broker in the country, and has been a Top 20 Producer in multiple recent years.  Daniel also has expertise in investment real estate and works closely with our veterans to help them with the VA mortgage process. www.sandiegolending.us  daniel@sandiegolending.us