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REVERSE YOUR THINKING

Everything about mortgages is better when it comes to Reverse Mortgages.

More and more people are contacting us about reverse mortgages to find out how they work and why they are beneficial whether they currently have a mortgage or do not have a mortgage.  More and more people are deciding to obtain a reverse mortgage for various reasons.

We talk to a lot of homeowners and their financial advisors, and it is obvious that there continues to be a lot of misinformation and misunderstanding about Reverse mortgages by many people.  Often the reluctance to get educated and learn about reverse mortgage is based on information and beliefs that are simply not true.  The fact that many people have these perceptions and beliefs is unfortunate because they are missing out on the opportunity to improve the financial stability and protect their housing security for both themselves and their spouses.

Here are a few of the things we hear.

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We encourage people to call us and find out why more and more people are utilizing reverse mortgages as part of the financial plan and retirement plan.  Get the real answers.  We don’t sell, we provide information.  If you are interested in finding out more about the benefits give us a call at 303-468-1985

 

 

REVERSE YOUR THINKING

Everything about mortgages is better when it comes to Reverse Mortgages.

You may have heard that a reverse mortgage has hidden risks. The fact is a traditional mortgage may not be your safest choice once you approach retirement age.  Here’s why. Homeowners with a traditional mortgage have their wealth tied to their home’s equity. And you can’t easily take advantage of this equity. For instance, you may face sudden medical bills, home repairs, or an emergency.

With a traditional mortgage you can’t access your equity and eliminate monthly mortgage payments. With a reverse mortgage, you can.

Advantages of a Reverse Mortgage

Security

A reverse mortgage offers a level of security for the owner(s) that simply cannot be obtained with a traditional mortgage in two areas.  The ability to remain in the home indefinitely without the requirement to make a mortgage payment.  The ability of a spouse to keep and maintain the residence following the death of a spouse.

Appreciation

Retain ownership and control of home and benefit from future appreciation of the property.

Ownership

The ability to transfer ownership as part of an estate plan and the ability to sell the property whenever desired.

Line of Credit

A reverse mortgage can also provide access to a line of credit that grows every year, is easily accessible, cannot be frozen, and allows for but does not require payments.  The proceeds of the line of credit are not taxable and can be used for any purpose.

Financial Planning Opportunities

For those with low mortgage balances or those without a mortgage, there are significant benefits that reverse mortgages can provide.  A reverse mortgage can help manage sequence of return risk that is a major issue in retirement planning.  Simply stated, sequence of return risk is the risk that an individual will run out of money faster than expected due to market conditions.

Additionally, a reverse mortgage allows for financial efficiency.  What is meant by financial efficiency is the ability of an individual to manage all assets in a unified manner with the ability to choose which asset can be used to best meet a financial obligation or need.  For example, rather than selling an investment or taking money out of a retirement account to meet a need and thereby lose the earnings from the investment, it can be more efficient to use a reverse mortgage and leave the other funds invested.  This can be accomplished without having to take on a large payment which is required if a traditional mortgage is used for the same purpose.

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There are many more benefits that are associated with reverse mortgages.  If you are interested in finding out more about the benefits give us a call at 303-468-1985

 

 

The primary reason people do not understand reverse mortgages is because there is a lot of misinformation presented by the media, financial advisors, accountants, attorneys and friends and family.  Although often well intentioned, the information presented consists of half-truths (at best) and at worst, totally inaccurate information.  And worst of all, the true benefits are not be presented due to a lack of understanding about what a reverse mortgage is, how a reverse mortgage works and what the benefits of a reverse mortgage are.

The intent of this article is not to explain reverse mortgages or to address many of the half-truths and inaccuracies that float around.  Many of these are addressed on the Spectra Mortgage website on the reverse mortgage page here.  What I want to do is to highlight the fact that for many people a reverse mortgage is superior to a traditional mortgage because it offers more security, financial planning opportunities and financial efficiency than a traditional mortgage.  Reverse mortgages also provide unique financial benefits to people who do not have a mortgage. Lastly, they can be a hedge against real estate values going down during retirement.

FINANCIAL EFFICIENCY

What is meant by financial efficiency is the ability of an individual to manage all assets in a unified manner with the ability to chose which asset can be used to best meet a financial obligation or need.  For example, rather than selling an investment or taking money out of a retirement account to meet a need and thereby lose the earnings from the investment, it may be more efficient to use a reverse mortgage and leave the other funds invested.  This can be accomplished without having to take on a large payment which is required if a traditional mortgage is used for the same purpose. The use of the reverse mortgage also avoids an income tax liability if investments or retirement assets are liquidated.

FINANCIAL PLANNING OPPORTUNITIES

For those with low mortgage balances or those without a mortgage there are significant benefits that reverse mortgages can provide.  A reverse mortgage can help manage sequence of return risk that is a major issue in retirement planning.  Simply stated, sequence of return risk is the risk that an individual will run out of money faster than expected due to market conditions.

A reverse mortgage can also provide access to a line of credit the grows every year, is easily accessible, cannot be frozen and allows, but does not require, payments.

Lastly, a reverse mortgage can be used to be a valuable tool for retirement income planning (which is different that financial planning).

SECURITY

Many ask if reverse mortgages are safe or will state that they believe they are unsafe.  The mortgage that is not safe for someone in retirement, or approaching retirement, is a traditional mortgage.  Here are two examples.

Example 1

Homeowner is 64 and is still working and has a mortgage.  Homeowner gets laid off or loses a job.  Being older it may be harder to replace the lost income and it can certainly take longer to replace.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage, they could have made payments if they desired but when they lost their job, they could have stopped making payments with no possibility of losing the house.

Example 2

Homeowners are married and both receive Social Security.  One spouse passes away which means the survivor only receives the higher of the two social security amounts, not both.  This effectively cuts their income by up to half or more.  With a traditional mortgage the bank does not care.  The payments are still due and if not made will ultimately lead to foreclosure.  If the homeowner had a reverse mortgage the fact that their income has declined does not matter since they are not required to make payment anyway.

REAL ESTATE VALUES

With a traditional mortgage if prices were to decline to the point where the loan balance exceeds the value of the property, the homeowner is still required to pay the entire balance of the mortgage.  This is known as being “underwater” and has happened often during recessions and when real estate values decline.

With a reverse mortgage if the homeowner is “underwater” the borrower is not required to pay the full balance if they sell the house or move.  They are only required to pay what the house is worth, and the rest of the mortgage is written off with no impact to the borrower or their beneficiaries.  This is a feature unique to reverse mortgages because they are non-recourse to the homeowner if they are “underwater”.

If the homeowner establishes a reverse mortgage when values are high and then real estate values decline, a homeowner will benefit since the reverse mortgage was based on the higher values.  Therefore, a decline in values is less harmful with a reverse mortgage compared to a traditional mortgage and is a hedge against a collapse in real estate values.

For more information on reverse mortgages and to get a complete picture of them, contact either Wayne Tucker at wtucker@spectramortgage.com or Kim Renquest at krenquest@spectramortgage.com. They can both be contacted at 303-468-1985.

Reverse Mortgages are not well understood by many homeowners, financial planners, investment advisors, accountants or attorneys. As a result, they do not understand that Reverse Mortgages can provide the following benefits:

  1. Supplement and manage retirement income and increase monthly/annual cash flow;
  2. Maintain and build wealth in retirement;
  3. Free up capital when purchasing a new home in retirement;
  4. Manage tax liabilities more efficiently and at a lower overall cost;
  5. Help people remain in the home without the fear of being forced to move due to financial reasons;
  6. Provide significant benefits for surviving spouses;
  7. Offer a source of capital and liquidity for needs such as home improvements, healthcare costs and possibly long-term care. The frame of reference most people have for a Reverse mortgage is from 10 to 15 years ago. Beginning in 2012 and continuing through 2018, Reverse mortgages have transformed from a product of last resort to a key component of an individual retirement income strategy. People attempt to compare a Reverse mortgage to other mortgage products when in fact they are more akin to insurance or a financial product that can provide capital and liquidity in retirement. Lastly, a Reverse mortgage can provide the peace of mind that a homeowner can remain in their current home for as long as they want. In the rest of this article we are going to address common misconceptions and myths that still exist regarding Reverse mortgage even though they have been substantially modified over the past 6 years. These myths and the lack of understanding unfortunately prevent many people who could benefit, from finding out the facts about how a Reverse mortgage may be able to help them.

 

MYTHS VS FACTS

MYTH #1 – A Reverse mortgage is a loan of last resort for desperate people.

FACT: Reverse mortgages have evolved from strictly a needs-based product to a solution that many financial planners recommend as an important component of a comprehensive retirement plan and a retirement income strategy. Many people who are very well-off get Reverse mortgages for a variety of reasons, including supplementing income, increasing liquid assets, extending the life of their assets, minimizing income taxes, and gaining additional financial flexibility in retirement.

  

MYTH #2 – When you get a Reverse mortgage, the Bank owns the home, you no longer do.

FACT: This is by far the number one misconception that people have. I have had financial planners, attorneys and CPA’s state this as a reason to not do a Reverse mortgage.  The truth is the homeowner retains title and 100% ownership with a Reverse mortgage.

 

MYTH #3 – The bank gets your home when you pass away and not your children or other beneficiaries.

FACT: When a homeowner passes away, their ownership interest goes into their estate or is transferred to the joint tenant the same as if there were not a Reverse mortgage on the property.

 

MYTH #4 – My kids or other beneficiaries will be on the hook for a big liability.

FACT: Borrowers can leave their home to their kids or other beneficiaries. When the borrowers pass away, the beneficiaries may either pay the balance due on the Reverse mortgage and keep the home or they may sell the home and use the proceeds to pay off the reverse mortgage. They will never pay more than the house is worth. If they sell the home, any remaining equity after the Reverse mortgage is repaid is theirs to keep. This is no different than what happens with a property that has a regular mortgage.

 

MYTH #5 – The bank can foreclose if you owe more than the house is worth.

FACT:  The only requirements to remain in the home are that the property taxes and insurance are paid, the HOA dues (if applicable) are current, the house is reasonably maintained, and that the last surviving borrower or an eligible non-borrowing spouse does not vacate the house for more than 12 consecutive months. Even if you owe more than the house is worth, the bank CANNOT foreclose if you continue to meet these requirements.

 

MYTH #6 – My spouse can be forced to move out of the home if I die.

FACT:  Borrowing spouses and eligible non-borrowing spouses can remain in the home after the co-borrower or the primary borrower passes away. The spouse only needs to continue to meet the conditions of the loan (see item 5 above).  In many ways this provides more protection than a regular mortgage.  This factor is one of the prime non-financial benefits of a Reverse mortgage.

 

MYTH #7 – I cannot ever sell my house if I have a Reverse mortgage.

FACT: While a Reverse mortgage is better suited for people who don’t plan to sell anytime soon, if circumstances change and you do need to sell, you can. You simply sell the home, pay off the balance with the proceeds of the sale, and the remaining equity is yours to keep.  No different than any other mortgage.  Also, a Reverse mortgage does not have a prepayment penalty.

 

MYTH #8 – Social Security and Medicare will be affected.

FACT:  A Reverse mortgage will not have any effect on your Social Security payments or Medicare benefits. However, there could be an impact on Medicaid or other public assistance programs that are means tested. Talk to your adviser to make sure you fully understand the impact if you have means tested benefits.

 

MYTH #9 – I will have to pay taxes on the money I get from a Reverse mortgage.

FACT: The proceeds from a Reverse mortgage, whether paid in a lump sum or periodically, are not subject to income tax. Consult a tax advisor for more information.

 

MYTH #10 – Reverse mortgages are extremely costly.

FACT: This is subjective since the fees will vary depending on the type of Reverse mortgage selected and the strategies that are being pursued.  In some cases, the costs will be higher than a traditional mortgage but it should be remembered that the benefits can be much more significant than a traditional mortgage as well.  A cost benefit analysis can only be analyzed once there is an understanding of the benefits that can be derived.  In most cases, the borrower will include the costs associated in the loan amount and will not have any out-of-pocket costs.

 

MYTH #11 – Reverse mortgage interest rates are higher.

FACT:  Reverse mortgages are guaranteed by the Federal Housing Authority (FHA).  FHA interest rates on a Reverse mortgage are very comparable to traditional mortgage rates.

 

MYTH # 12 – Reverse mortgages have hidden risks that can cost you your home.

FACT:  This is a catchall myth.  The terms of a Reverse mortgage are very clear.  A borrower must pay their property taxes, homeowner’s insurance, keep the property in good repair and must maintain the property as their primary residence.  These obligations are not hidden.  In fact, for anyone carrying a regular mortgage, with monthly mortgage payments in retirement, I would argue that a regular mortgage carries substantially more risk of losing the house than a Reverse mortgage.

 

The last myth to discuss deserves its own section because in some ways it is the least understood part of a Reverse mortgage but may be the most significant benefit. Often people hear or believe the following.

MYTH #13 – A Reverse mortgage will use up all my equity and reduce the amount available for inter-generational wealth transfers to my kids, grandkids or other beneficiaries.

FACT:  The common belief is that a Reverse mortgage reduces equity, thereby reducing the value of the estate for the homeowner’s heirs and this is presented as a negative.  Current research and thinking on Reverse mortgages show this is not necessarily the case:

  1. The belief that equity is reduced is often not true since the amount of the mortgage, the length of time it is outstanding, and the appreciation rate of the house could result in an increase in equity;
  2. Even in situations where the equity is reduced this is not a weakness, it is by design. A basic underlying philosophy of a reverse mortgage is that the homeowner can make better use of their equity than their heirs or other beneficiaries. This can allow them to be self-sufficient and in a better position to fund their retirement, enhance their quality of life, and effectively manage all their assets.
  3. When used in a strategic manner, the use of a reverse mortgage can result in a greater ability to pass on wealth since it can be used to preserve other financial assets that can continue to grow.

The desire to preserve home equity is often a psychological constraint that people impose on themselves which can lead to a less efficient retirement. Under the concept of retirement income efficiency, home equity and other financial assets are equivalent, and they should be looked at in total rather than in isolation.  While taking money from the Reverse mortgage may reduce the home-equity component, it does not necessarily reduce the overall net worth or value of the total assets since other financial assets can grow rather than be drawn down.

Retirement-income efficiency is defined as: using assets in a way that allows for more spending and/or more wealth over time.

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If you are interested in finding out about some of the benefits of a Reverse mortgage click on this link for another article that outlines the benefits and how and why people use them.   If you have interest in discussing reverse mortgages, contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.

Reverse Mortgages are not well understood by many homeowners, financial planners, investment advisors, accountants or attorneys. As a result, they do not understand that Reverse Mortgages can provide the following benefits:

  1. Supplement and manage retirement income and increase monthly/annual cash flow;
  2. Maintain and build wealth in retirement;
  3. Free up capital when purchasing a new home in retirement;
  4. Manage tax liabilities more efficiently and at a lower overall cost;
  5. Ability for people to remain in their home without financial fear of being forced to move;
  6. Provide significant benefits for surviving spouses;
  7. Offering a source of capital and liquidity for needs such as home improvements, healthcare costs and possibly long-term care.

The frame of reference most people have for a Reverse mortgage is from 10 to 15 years ago. Beginning in 2012 and continuing through 2018, Reverse mortgages have transformed from a product of last resort to a key component of an individual retirement income strategy. People attempt to compare a Reverse mortgage to other mortgage products when in fact they are more akin to insurance or a financial product that can provide capital and liquidity in retirement. Lastly, a Reverse mortgage can provide the peace of mind that a homeowner can remain in their current home for as long as they want.

The following are examples of how people use Reverse Mortgages as a financial planning and long-term care tool and some of the benefits they derive:

  1. Pay off an existing mortgage thereby eliminating the monthly principal and interest payments. This results in a monthly and annual increase in cash flow;
  2. Ability of surviving spouse to remain in the home indefinitely without the financial burden caused by losing half of the household income (in many cases more);
  3. Create a tenure or term payment to supplement income;
  4. Use a Reverse Mortgage to delay receiving Social Security to age 67-70 thereby increasing the monthly Social Security benefit going forward;
  5. Maintain a line of credit that grows for emergencies (such as medical expenses);
  6. Avoid capital gain tax consequences of having to sell other assets to fund retirement;
  7. Create and maintain financial flexibility by not being forced to liquidate investments in a market downturn;
  8. Ability to cover expenses so that other assets can remain invested and grow;
  9. Fill in gaps in retirement planning caused by lower than expected returns;
  10. Eliminate other debts;
  11. Purchase a new home without having to tie up cash that could otherwise be invested and grow over time;
  12. Fund health insurance and/or long-term care needs;
  13. Fund health/medical related needs which can enable people to live in their home longer;
  14. Pay for in-home care or physical therapy following an accident or other medical event;
  15. Re-model a home to accommodate aging limitations in order to remain in the home;
  16. Convert a room or basement to a living facility for an in-home caregiver;
  17. Assist children or other relatives through family emergencies;
  18. Use to fund a child’s or grandchild’s education; and
  19. Assist a child or grandchild with a home purchase.

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If you are interested in finding out about some of the common myths and inaccuracies that circulate regarding Reverse mortgages, click on this link for another article that outlines the Myths vs. Facts of Reverse mortgages. If you have an interest in discussing Reverse mortgages, contact Wayne Tucker at 303-468-1985 or at wtucker@spectramortgage.com.

WHAT IS THE DEAL WITH REVERSE MORTGAGES?

Spectra Mortgage entered the reverse mortgage market in 2018 and we are now able to provide the same type of financial advice and information on reverse mortgages that we have provided our clients over the last 13 years regarding their mortgage options.

The primary reason Wayne chose to enter this market is because he knows that too often people are not able to get the information they need to determine if a reverse mortgage is something they should consider or something that might benefit them. With all due respect to Tom Selleck, he does a terrible job as a reverse mortgage spokesperson.  Also, people do not want to deal with a sales person over the phone who may only be interested in making a sale and is not capable of providing the information needed to understand and evaluate a reverse mortgage.

As most of you know, Wayne began his career as a CPA, and for the last 13 years he has been involved in the mortgage industry as the owner of Spectra Mortgage. Prior to that, he was a tax advisor to businesses and individuals.  Spectra Mortgage believes that a reverse mortgage is a financial product that can facilitate and enhance financial and retirement planning and is an option that should be explored by a wide range of people at different points of their life.  A reverse mortgage is primarily used for one of the following purposes:

Most people, including financial planners and other advisors such as attorneys and CPA’s, do not have even a basic understanding of what a reverse mortgage is, how it works and when and why they can be beneficial. Even worse, what many people think they know about reverse mortgages is wrong or incomplete and based on inaccurate information.

A reverse mortgage can have many financial and non-financial benefits. Following is a partial list of how a reverse mortgage may be able to benefit a homeowner:

There is a common perception that reverse mortgages are only for people who are desperate. While they can in fact be life savers for people in difficult financial circumstances, the reality is that the wealthier someone is and the more assets they need to protect, the more benefits they may be able to obtain from a reverse mortgage.

For the reasons stated above, we believe reverse mortgages are a good fit for what Spectra Mortgage does and feel like we can do a great job of helping our clients understand this unique financial product. If you, a family member, or a friend would like to learn about how reverse mortgages work, how and why they are used, and get solid information rather than a sales pitch, we are ready to offer this to all our clients. Don’t hesitate to call or email us if you or someone you know wants more information.

A recent article in the USA Today newspaper (USA Today Article) sets forth a number of steps an individual working to save for retirement can take to enhance their planning and nest egg.  Several of the steps are either directly or indirectly related to the mortgage an individual may have and/or their overall housing costs.

The first area has to do with getting rid of or reducing the size of a mortgage and the related mortgage payment.  This can enhance the standard of living by decreasing monthly expenses and increasing savings. By downsizing and reducing or eliminating a mortgage payment, if any, the savings can free up funds to allocate towards increasing the investment portfolio.

The second area deals with how a Reverse Mortgage can be utilized in the following ways for retirement planning by anyone over the age of 62.

  1. The use of a reverse mortgage can allow an individual to delay the receipt of retirement income early in retirement.  Often with plans such as Social Security, the longer you can wait to start receiving benefits the larger the benefits will be when they are started later.  The impact of even a two or three year delay can be substantial.
  2. Obtaining a reverse mortgage with a line of credit feature will provide someone with financial flexibility they may need later in life. The primary benefit of this option is that the line of credit can grow a faster rate than many investment portfolios.

A reverse mortgage can be a key component of the retirement plan for any homeowner.