I had a quick conversation with a gentleman after a One Business Connection meeting. (A networking organization we both are part of) He has listened to my “elevator pitch” on Reverse Mortgages for a couple of years, this time, something I mentioned caught his attention.
He and his wife are both in their early 70’s and they own a paid-off home worth about 1.1 million. This is a recap of that conversation.
“Hey ‘Bob,’ sounds like you have a few questions about what I shared this morning.”
“I do. You mentioned the interest rate for a Reverse Mortgage is about the same as the current 30 year mortgage. So that means I would be paying about 7% on the money in my line of credit, is that right? I figure that would be about $3,000 a month.”
“A month!” I said. “I don’t follow. Where’d you get that number?”
“The interest on my entire line of credit would be about $3,000 a month, wouldn’t it?”
What They Thought And Why
As I mentioned, over the past few years I’ve talked with Bob a number of times about a HECM (home equity conversion mortgage) and he has talked with his wife about a Reverse as well.
Her big objection was based on the perception that they would have to give their home to the lender when they passed and, that the interest would be charged on the entire Line of credit from the beginning.
If either of those perceptions were true, I wouldn’t be in the Reverse business, let alone ever do a deal that had those features and terms.
Back to our conversation:
“The lender doesn’t have any right to your property, they only get the payoff on your loan balance when you pass, leave or even refinance your Reverse loan.”
“That makes more sense.” He said, “What about the line of credit interest?”
“You only pay or accrue interest on the amount of money you have used, or take out. In your case that would be your loan costs and whatever cash you take from your line of credit.”
“I can see that now. It didn’t make much sense even though we like the idea of doing a Reverse Mortgage. Now I have some much better news to share with my wife.”
We Also Discussed Wealth Transfer And Estate Security
“Do you remember I mentioned the estate security aspect of a Reverse Mortgage?”
“I do.” He said. “Isn’t that about FHA putting a big lien on my title at closing?”
“Yup, that’s it. 150% of the value of your home. I just learned something that I didn’t know about that, want to hear?”
“Sure.” He said.
“I asked a personal injury attorney if he would try to collect a judgement against a person who had a Reverse Mortgage? He said, ‘No, I wouldn’t be able to enforce or collect it. I can’t attach their Social Security, or other retirement benefits.’ I asked if he could force someone to pay out of their Line of credit. He said, ‘No.”
“That is interesting, I didn’t know that.” Bob said.
“And I asked his this; could you collect from a person who had a paid-off or mostly paid off home? He said, ‘I could force the sell of that home anytime.’ I didn’t know that, did you?” I asked.
“No I didn’t.”
On A More Pleasant Note
“And think about this. If you wanted to start transferring wealth to your family, you could use Line of credit money for that. For example, if your kids are paying on a mortgage, you could help pay down and accelerate their loan. I think you know how that works.” I said.
“Yes I get that. But we can only gift them about $15,000 per year.” He said.
“That’s true. But it’s still a solid idea.”
Then he said this, “Well that gift limit is per-person. That would add up for the entire family, and if it was applied to their mortgage, over time that would save them a great deal of interest expense.”
“Funny how that’s what we started talking about. That’s a good thought to end on. Have a great day.” I said.
I’m sure “Bob” and I will talk again.
Thanks for stopping, looking & listening.
Mark Schmidt 720-206-4539
Remarkable Reverse Mortgage
