Scott returned to the Fusion One Lounge to break down Reverse Mortgages: What they are, how they work & how they can help you leave behind a stronger legacy for your children.
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Read the Full Interview Below
Sarah: Well, good morning everyone. It’s 8:00 AM, and we have another familiar face today. He was with us last week and we’re going to cover a lot of ground today. So, let’s get started. Good morning, everyone.
Kelsi: Good morning!
Scott Stearns: Good morning!
Sarah: You may notice we’re down a soldier this morning. Unfortunately, Glyna is still without power. So no power, no Wi-Fi. She’s just sitting in the dark. But the show must go on and here we are. And we’re so excited today. Welcome to Biz Talk. We’ve got a great show for you. I’m Sarah with Fusion One and around our triangle, we’ll say today, I’ve got Kelsi with Fusion One, and our special guest, Scott with MortgageBanc.
Kelsi: Hi, Scott.
Sarah: Good morning.
Scott Stearns: Good morning, everyone. Thank you, Sarah.
Sarah: You’re very welcome. We’re very excited. Before we get started, Kelsi, do you want to pop-up all of our social media platforms?
Kelsi: I sure will. Don’t forget, we go live from Facebook, YouTube, and Twitter twice a week. You can catch those replays on Instagram and on LinkedIn. Don’t forget about our podcast, Marketing and a Mic. You can find that where all the podcasts live and don’t forget to subscribe to our YouTube channel. We update our YouTube channel every week with great information and videos about how to conduct your digital marketing. So, be sure to subscribe to that.
Sarah: Oh, goodness. Okay. So last week you really gave us a thorough overview of mortgages and a lot of information that homeowners needed to know as well as credit checks, credit repair, all that good stuff. Today, we’re going to talk specifically about reverse mortgages, and I got to tell you there’s so much information to share about this, as well as a lot of misinformation that’s out there. So, I’m real excited to get started. Let’s talk just from the top. What is a reverse mortgage and how does it work?
Scott Stearns: Okay, so let me start, Sarah. You’re exactly right. There’s a ton of information, but we try to keep it simple so people can understand it. So, it doesn’t have to be overwhelming. So, I’ve been in the industry for 19 years in the mortgage industry. About 10 years ago, I became a VA mortgage lending specialist. And about four years ago, I added the reverse mortgage to my line of expertise so I can serve those that are 62 and older. So, to your question, you have to be 62 or older. The reverse mortgage applies to your primary residence only, not a second home or an investment property or anything like that. And basically, reverse mortgages are just like a regular mortgage, interest accrues just like a regular mortgage. The biggest difference is, there’s never a monthly payment required. So, if you’re 62 or older, you’re in the fixed income portion of your years, maybe the stock market hasn’t been so kind to you, and you just figured out that you don’t have enough money to live on every month, but you’re sitting on a ton of equity in your home, this may be the answer.
Kelsi: Perfect. So, is this something that every 62-year-old should consider, or can you give us some examples of when the reverse mortgage would make a lot of sense for the borrower?
Scott Stearns: Yes. A good question. I’m not rushing it, I’m 51 now, but I can’t wait to get 62 because this is the first thing that I’m going to do. So, every 62 and older client should look into this, whether they’re refinancing their home or buying a new home only to look at it as possibly a viable option instead of going into retirement and signing onto a new 15 or 20 or 30-year mortgage and having to make payments. I said a while ago that it may be something that they could eliminate their monthly payment, which is true, but we’ll talk a little bit more about how savvy, investor clients with millions of dollars in assets are using the reverse mortgage as well as a strategic financial planning tool in the spending part of retirement instead of accumulating up until retirement. So, yes. Everyone should look at it. And we do that with a complimentary review. We provide them all the information. There’s no high pressure. There’s no… It’s just that the numbers don’t lie. So, we show them the numbers, let them and their family make the best decision for what they need to do and where they’re going in life.
Kelsi: Have a little coffee and conversation, no pressure.
Scott Stearns: Coffee and conversation. That’s exactly how I phrase it. I try to set up the appointments at the client’s home. That way they’re in their comfortable environment. I come over, and for example, and say, “Hey, I’m going to come over Thursday morning for coffee and conversation, and I’m going to bring you a brochure to leave it with you with some information that you can read,” and it’s a magazine-sized brochure, but it’s only eight pages. So, it’s not overwhelming. And I try if it’s possible if it doesn’t prohibit with work schedules, I try to get the adult children at the meeting as well so they will know what’s going to happen in the future for them after the reverse mortgage.
Scott Stearns: Yeah.
Sarah: We’ve got some folks joining us this morning. We’ve got Kirk Edmonds. We’ve got LaVon. We’ve got Melissa Dixon said, “Ready for round two,” and we’ve got Cindy. We love our loyal fan base, I’m telling you. We really, really appreciate it. And Cindy wanted to say, “Good morning. Thank you, Scott, for covering reverse mortgages. They are not what they used to be.” And that is the truth.
Scott Stearns: That’s exactly right. And Cindy and I have talked, not at length, but we’ve talked over some of the highlights and she understands that they are not what they used to be. Back in 2013, HUD and FHA came into the program, completely revamped the program and now it’s fully insured. So, how people used to think, you would sign over onto a reverse mortgage and then at the end of life, whatever equity was left, you lost it. The government got it. The family or the heirs were out of luck and it’s just not that way anymore.
Kelsi: That’s awesome.
Sarah: Yeah. That’s really great. So, we’ve got a little video clip that you’re going to share with us, but you’ve talked about that there’s no monthly payments. So, if there is no monthly payments, how does that work with interest accrual and all kinds of other things? What do they have to factor?
Scott Stearns: Yeah, so obviously it’s a loan. So, there’s going to be interest. It’s not free money. So, Jeff, think of it this way. When you make your monthly payment on a regular mortgage, a little bit of that… Well, not a little bit, a lot of that goes to interest. You can look on your statement and you can see how much goes to interest. And especially on a 30-year loan and you cringe when all that went to interest, and then a little bit comes off of your balance. And then it catches up with itself at about year 15 or so. This is just exactly the same, except interest is accruing on the loan balance behind the scenes with no monthly mortgage payment required. So, actually, I prepared a video for you guys that I prepare for each and every individual client. So, it’s specific to their numbers and the video will explain exactly what you just asked me. All set.
Kelsi: All right. Here we go.
Scott Stearns: Hey, Fusion One team. So, this is a sample of what I would send to a reverse mortgage client. And I’m just going to walk through this. And this is a feature that I use on my computer. So, it really makes it like we’re almost sitting down face to face. And this has really helped, especially during COVID, when we can’t meet face-to-face as often as we used to. So, in this scenario, the borrower is 72 years old, the interest rate, it shows expected and initial, and we just have to do it this way because the rate is not set until the closing. So, that’s why you see that difference. But in this scenario, the value of the home is 300,000. They still have a $125,000 balance on their mortgage that they want to pay off and eliminate that payment. In this example, that’s a $1,200 a month payment that they’re making in retirement in fixed income, that’s really, really strapping them. So, what we do is we take, based on the age, we take a percentage of the value and we come up with an initial principle in it. This is the total amount of the loan that would be available to them. Well, they only need to pay off the mortgage and then cover the closing costs. I’ll go into that a little bit further in just a minute. So, when you add these two together, you get this total number, 134,802. So, this is their initial loan amount. The expected appreciation value of the property, this defaults to 4%. Sometimes I’m a little more conservative and I use 3%, but this one is 4%. So, in the initial line of credit… Okay. So, after they close, they have this much available to them, but they’re only using this much. So, they have another 24,000 available to them, if they want to draw off of this reverse mortgage equity line in the future, they’re welcome to do that. So, we talked the other day about, okay, so “when I am getting a reverse mortgage and the interest is accruing behind the scenes. I am losing equity.” So, I wanted to show you this in this scenario. On this loan program, the interest is accruing on this balance at 5,200 per year. It’s only going up because the balance is going up. But if you choose to, instead of eliminating your full monthly payment of $1,200, if you want to pay $438 a month, you could offset the interest accrual and still have a savings every month in retirement of $762. You do not have to pay this on a reverse mortgage monthly payment is never required, but a monthly payment is allowed. So, I just showed you that if you wanted to keep any interest accrual at bay. It’s the same thing as a regular mortgage with interest accrual. You look at the end of the year and see how much interest you’ve paid. It’s basically the same thing. This just accrues silently behind the scenes and grows over the years. But what you have to look at is, okay, yeah. This interest is accruing, but you’re eliminating a $1,200 every month. So, there’s $14,000 a year of payments that you’re eliminating. At the end of the first year, the loan balance would grow if you did not make this payment. The line of credit’s here. The estimated value. So, when we started at 300,000 with a 4% appreciation value scenario, the property value increases here, and this far column to the right leaves what your equity looks like. So in this case, now this is not always true. We can’t say that forever the appreciation value is going to be 4%, but in this scenario, the house is appreciating at a greater rate than the interest is accruing. So, you can see the equity is growing over the years, and then it counts down through 28 years to age 99, based on this particular borrower scenario. So, if we’re eliminating a $1,200 payment, you’re thinking, okay, 9,800 is a lot for closing costs. So, what I do is divide that out by the $1,200 that we’re saving every month. It equals that recuperation of that cost in 8.1 months. The financial planners say, if you can recoup that cost within 36 months or less, it makes good financial sense. This is recouping in 8.1 months. 6,000 of this number is the FHA insurance. This is a non-recourse loan and the FHA collects the insurance in the closing. So, really the normal closing is only about 3,800. So another video is a little long. I wanted to go into detail on that. I hope that helps. And thank you again for having me!
Sarah: That was so helpful.
Scott Stearns: So you can see, we talked the other day and I did not have time to put numbers in front of you guys when we talked. But now you can see the numbers and it makes a lot more sense. I think.
Kelsi: It makes perfect sense. Yeah. Hope all of you out there were able to keep up.
Scott Stearns: Yeah.
Sarah: I liked that you balanced that up by showing that you have this monthly payment, but really when all things considered it’s, you’re eliminating that monthly payment. So-
Kelsi: A few hundred extra dollars in your pocket every month is huge when you’re on a fixed income. That’s-
Scott Stearns: You’re not kidding with doctor co-pays and prescriptions, and I have worked for quite a few elderly ladies that their husband has passed away. Well, let me tell you, you’re not taking away that beauty shop trip from those ladies. So, beauty shop expenses whatever, that’s the time of life that you want to live life and do what you want to do when you want to do it and do for your children and your grandchildren the way you want to do it. And that really frees people up to do that.
Kelsi: Absolutely. Well, you mentioned earlier that the reverse mortgage itself was revamped in 2013 when HUD and FHA backed it and insured it. So, can you kind of dive into what those improvements were? How did it change exactly?
Scott Stearns: Yeah. So, one of the brochure pages, page eight, it gives a complete list of common myths and misunderstandings, and then right under it, it gives the actual fact. So, the opening paragraph basically says that a lot of well-meaning people, family members, trusted friends, will tell you that the reverse mortgage is the last thing you ever need to do. And they’re really not being rude, but they’re just really not up on the facts of the matter in today’s market and what changes have occurred. So, if anyone wants that brochure, if they will respond to you guys and you forward it on to me, I’ll put one in the mail to them. It’s only eight pages. It’s very easy to read and it’s titled The New Reverse Mortgage. So, basically the biggest change Kelsi is that the reverse mortgage is now a non-recourse loan. So, what does that mean? So, it means that the house or the property owes the debt, the individual, your grandmother, or if she passes away, you as an heir, or your parents, you would not owe the debt. It’s a non-recourse loan. So, the property owes the debt even in the case that on the video that I showed the equity was accruing and increasing because of those interest rates. Well, we don’t know what interest rates are going to do every year for the next 10 years. We don’t know what property value appreciation is going to do. Typically, historically, property’s your best investment ever. But in the case that they lose equity and they get to the end of life and they’ve been in the reverse mortgage for 20 years and they’re upside down, that FHA mortgage insurance that I showed that’s collected in the closing, that’s just like GAP insurance on a car policy. If you buy a brand new car and it depreciates and it gets totaled and you owe more than it’s worth, you have GAP insurance writer on your policy, and it covers the balance and you don’t have to pay out of pocket. Well, that’s the same thing that happens on the reverse mortgage. So now, there’s no recourse to the heirs or anyone else involved and then in that case that I showed, if they sell the home and pay off the reverse mortgage balance, whatever it’s accrued to, they sell it for $300k, the balance has accrued up to $150,000. They pay off the loan, just like a regular mortgage. They order a pay off a letter, pay it off. It’s a lien against the property. They pay it off and the heirs walk away with the other $150,000.
Kelsi: Wow. Can’t beat that.
Sarah: That FHA insurance is so key and it helps kind of bridge that gap so that they’ll absorb, if there is something owed, they’ll absorb the cost. Is that accurate?
Scott Stearns: That is accurate. And that the important thing about that is, it’s a self-insured program. So, when that happens and it’s upside down, that loss is not passed on to the taxpayers. It’s already collected in that transaction. So, it’s self-insured from the start. That premium is not something you have to pay out of pocket. It is included. You saw that it’s included in, we paid off the balance of the mortgage that was remaining. We put the closing costs in and gave them the new total loan amount. So, it’s included in there. It’s nothing that you come out of pocket with.
Sarah: That’s why it’s really key that the heirs or the children be a part of the process so that they fully understand how it works in that scenario. So, what would you say are some triggers or responsibilities that come with kind of the beginning process of a reverse mortgage?
Scott Stearns: Okay. So, the trigger – on a reverse mortgage there is no term. We’ve always been accustomed to getting a 30-year fixed-rate mortgage or a 20-year or a 15-year loan. And on a reverse mortgage, there’s no term. It’s not a 30-year fixed. It’s not a 15-year fixed. Once it’s in place, it cannot be revoked. Just this year due to COVID, a lot of the equity lines from the banks were being closed involuntarily because the 30 million people out of work, and the economy, and half the businesses shut down. The banks were really getting nervous and they were shutting down equity lines. Once this is in place, it can never be revoked. And I’m sorry, I lost my train of thought. You asked me another question…
Sarah: Well, some of the triggers, some of the things that they need to know about.
Scott Stearns: Yes. So the trigger, so because there’s not a term and an ending to the term, the trigger would be, there’s two triggers, death, or the borrower no longer resides in that property as their primary residence. So, they either move in with family and now that’s their primary residence, or they move to assisted living or a nursing home. And that becomes their primary residence. And the home that the reverse mortgage is placed against is no longer their primary residence. So, that is the trigger and the heirs, let’s just for simplistic sake, let’s just use death as the trigger. So, the reverse mortgage client passed away. The heirs have an initial six month period to settle the debt. So, during that six month period, the interest just continues to accrue. No monthly payments become due, all of a sudden, so nothing changes at all, but it gives the family time to settle the estate or have a proper time to grieve, or we don’t know if they’re going back and forth from different states or whatever. So, an initial six month period. And then what happens is they sell the home. When they go to the attorney’s office, there’s a lien on the title to the reverse mortgage company, just like a regular mortgage. They pay that off and they walk away with the difference. Let’s say that the property was caught up in probate. Maybe there wasn’t a will and now it’s taken more than six months to settle the estate, you can file for two 90-day extensions. So, 90 days is three months, two of those is six more months. So, really up to a full year with certain circumstances that you could wait to settle the debt that was owed.
Sarah: Two great questions. Kelsi, do you want to grab a couple of those questions? LaVon’s got a really good question.
Sarah: Yeah, I’ll pop it up for you. Let’s start with this. What if the housing market tanks and the home value decreases? Are there any safety measures available in this case?
Scott Stearns: Yes. So, do you want to tackle that now?
Sarah: Whenever you want.
Scott Stearns: Okay. Yeah, we can do it now. So thank you, LaVon for tuning in and for giving us a great question. So, in the case that… And when I’m sitting with people having coffee and conversation at their kitchen table, we always cover this and we say, “Okay, if you get to the end of life and your value is $300,000. You only owe $150k. You sell it, you walk away with $150k, you put it in the bank or whatever, but let’s say, what if that doesn’t happen? What if 2007 and 2008 happens again, and the market crashes and there’s, a market full of foreclosures, or they build an interstate through your backyard and your property goes to nothing?” So, in that example, let’s say the house is worth $300,000 in the beginning, but now it’s worth $250k and the reverse mortgage has accrued to $300,000. So, now the value of the home is $250k, but what they owe on the home is $300,000. So, it goes back to the non-recourse loan piece of the equation. So, the heir, if the client passes away, the heirs come in and sell the home. The heirs, first of all, have what’s called first right of refusal. So, they could purchase the home for 95% of the value of the home, not what’s owed on the home because that house owes the debt, not the heirs. So, that’s the non-recourse part. So, let’s say, for example, it was a family home or a farm or something, and they wanted to keep that property in the family, the heirs could buy the property for 95% of the appraised value. So, 95% of $250,000, not the $300,000 that’s owed. So, then that’s where the FHA, GAP insurance comes into play. It covers that difference. And of course, this one loan does not collect enough insurance to pay that, but just like an insurance policy, you pay a thousand dollars for an insurance policy, but you may have $200,000 worth of coverage. And let’s say, the same situation. They don’t want the home, and they want to sell the home and get rid of it. They already have a home, they’re in their school district or whatever. They don’t need the home. So, the FHA insurance even has a provision to pay the real estate agent commission to sell and market the home, even though it’s already underwater. So, they can sell it for $250,000, it’s owed $300,000, they’ll pay the realtor to sell the home. Once it’s sold, then the insurance covers the gap and everyone walks away. Nobody owes anything. The property owed the debt, not the family or the heirs.
Kelsi: So, the word of the day is non-recourse.
Scott Stearns: Non-recourse is the new term that’s really… It really takes the edge off of what people used to think. And that’s one of the big changes is used to, the client would pass away. There would be equity left. The government would get the house and the heirs are out of luck. And now, you never even signed over your title or deed to anyone. You maintain title and deed ownership throughout the entire process.
Sarah: Wow. A lot of safeguards in place. That’s for sure.
Scott Stearns: Yeah, exactly.
Sarah: LaVon has another question here, “Is FHA mortgage insurance required?”
Scott Stearns: It is. It is an FHA program. So, it is required and that is exactly why, what we just talked about, the non-recourse part of it. And also like in the example on the video, they still had $24,000 dollars available to them after they paid off their mortgage and eliminated their debt. If they left that alone and did not draw off of that, one of the neat features of the reverse mortgage line of credit is that it’s a line of credit. It’s not like a regular fixed mortgage, so that amount will continue to grow over the years. So this time, next year, it grows at the same rate as whatever the interest rate is on the loan. So, this time, next year, that $24,000 this year, they may have $30,000 available to them at the end of next year. And they may have $38,000 available to them the year after that. So in the future, when they needed it if unexpected expenses or medical situations came along, they could draw that money off in the future because it’s continued to grow and increase on that line. If they tapped it out after they closed the house and they wanted some more money back, then you would tap out that line and you would be done. You might put that money somewhere else. If you’re getting a lump sum out, I would always check with a tax advisor because you don’t want to mess up any kind of Medicare or Medicaid benefits that you’re receiving due to income.
Sarah: Yeah. Well, we talked about the fact that you’re protected, even if the housing market declines. What are some other kinds of misconceptions or non-truths, if you will, that you come across in your coffee and conversation?
Scott Stearns: So, sometimes, people when I talk to them, they’re kind of almost a little bit angry, partly because they’ve found themselves in this situation that their back’s against the wall, and they’ve been taught their entire life to work hard, pay extra on your principal and pay your mortgage off and not have a mortgage payment in your retirement years. And now, they’ve gotten here and that magic equation is not paying all the bills. So, one of the misconceptions that I sit down with is they’re saying, “Okay, so if this interest is accruing behind the scenes and I can’t afford to pay that interest and offset the accrual, then I’m just going to lose all my equity.” So, the fact of the matter is you are losing equity, but you saw, in our example, we eliminated a $1,200 a month mortgage payment. So, that was over $14,000 a year in savings for a cost of $5,400 a year in interest. So, you kind of just have to stop and really look at the numbers, the numbers don’t lie. So, we get emotional and we think about losing the equity but what people forget about is that their property typically is going to appreciate. If it doesn’t appreciate every single year, just like the amortization chart showed, it may go like this and even out, or increase depending on what area they’re in. But that’s the piece that people forget about, the property value appreciation piece. So, in a 4% appreciation and a 3.1% interest rate, they have appreciated more than the interest is accruing. Let’s say that was reversed. Let’s say they had a 3% appreciation and a 4% interest rate. So, they have a 4% interest rate, but they’ve got the appreciation. So if you look, you’ve got a net 1% difference per year to change your entire quality of life in your retirement years. So, it becomes more than just a financial piece for people. It allows them to live and grow their wealth, maybe leave their money alone and let it continue to grow in compound interest in their other investments and defer some taxes.
Kelsi: Mm-hmm (affirmative), yeah. So, does the house have to be paid off in order to qualify for a reverse mortgage? Or can you just tell us how the loan… Well, sorry, how is the amount that you can borrow determined?
Scott Stearns: So, the house does not have to be paid off. In the example, on the video, they still had a $125,000 balance on their mortgage. So, we eliminated that. So, we have other clients that they have their house paid for, and they just need some extra income coming in every month because now they’re in fixed income social security, maybe they worked for a company and before they were fully vested with their pension, they got let go because of whatever reason, downsizing, their age, whatever, and the pension that they thought they were going to have is not there anymore. And that’s more and more a reality. You can see how rare it is these days that anybody works for a company for 30 years and retires with a pension. So, they could pull that money in, every month alongside their social security. And now, they have double the income that they would have. The really cool thing, Kelsi, about that income, it’s not considered income. That is their money, that they’ve paid into their equity over the years. So, it’s just their money sitting in their house, in the form of equity. We just convert it to cash. And when that money comes in, it’s completely tax-free because it’s not considered income. It’s their money that they’re borrowing from themselves. So, that’s huge.
Sarah: That is huge. John Chambers is joining us. He says, “Great info there, big daddy.” You’re never going to let go of big daddy I’m telling you.
Scott Stearns: Chambers. I miss that guy. Man, we had some good times at the gym. I mean, he didn’t really ever do much. He kind of just stood around, but we had some good times.
Kelsi: That’s great.
Scott Stearns: Rob Humm will verify that.
Sarah: He was just there for show?
Scott Stearns: Yeah.
Sarah: Oh, we also got Steve Johnson joining us. Good morning.
Scott Stearns: Hey Steve. Thanks for tuning in buddy!
Sarah: And Melissa’s got another question. She wanted to know what conversation she should have with her two adult sons concerning their home.
Scott Stearns: So, hey, Melissa! And so, I am 51 and as I said, I’m not rushing it, but I’ll be signing up for my reverse mortgage when I turn 62. But great question with your adult sons. And that would be something I’ve worked with Melissa and her family several times over the years. That would be a perfect situation that we could have coffee and conversation because Melissa, I’ve not yet seen your new house that we put you in a couple of years ago. So, a great excuse. I’m inviting myself over how about that? But that is just something that we have to look at on an individual basis with every single client and every situation. Everybody’s situation is different. Some people have their house paid for, some people still need to pay for their house on, into retirement years. Some people, this is a point that I made, with y’all, the other day. This has come together. It’s kind of the imperfect storm that has come together here and why HUD and FHA came together and revamped this program in 2013. And that old knowledge is still floating around out there. And we’re going on eight years that it’s been different. This was first initiated by Ronald Reagan in 1980. So, you can imagine we’re going from 1980 to 2013 with that type of program and guidelines. And now, we’ve only had eight years to try to re-educate people. So, it’s a process, but what has happened is 10,000 baby boomers are turning 62 every day for the next 18 years. So, I talked a little bit about it a while ago. Baby boomers, turning 62, we’re typically healthier. We’re exercising more, we’ve got better access to healthcare and medication. We’re eating better and all of a sudden, as I said a while ago, those pensions people working at a company for 30 years and having a pension and then social security on top of that, that’s not as readily available as it used to be. It hasn’t been for years. And then if someone didn’t go outside of social security, that was mandatorily taken out of their paycheck. If they didn’t go and invest in a 401k or somebody like Melissa, and her husband self-employed invest in a SEP or something extra along the way, and all they have is social security, is not enough. So, it’s kind of they figured out people are outliving their money, and they’re sitting on two or three or $400,000 worth of equity in their home. There’s over $7 trillion of equity in Americans’ homes right now, sitting there doing nothing. And people think, well, I don’t want to touch that. I don’t want to lose my equity. I want to give my house to my children, to my adult children. Well, every single conversation I’ve had that there’s a gap between the comprehension of the retired adults and the adult children, and the parents want to give their house to the children. And every time the children say, “We don’t want your house.” We have a house. And we are in the school zone that we need for our children and whatever. We don’t want your house. We want you to be around and to live and to be able to travel with us with the grandkids or do whatever. So, one of the things that the financial planners are doing with the reverse mortgage is they’re utilizing the reverse mortgage proceeds to leave the assets alone. So, if someone has done a 401k or a SEP to leave those assets alone, to continue to grow in compound interest over the years and utilize the reverse mortgage with, like I just said a while ago, the tax-free income coming in to either bridge the gap from, instead of taking social security at age 62, when it’s the lowest monthly amount that you’ll get, maybe just bridge that gap to 67, five years with the proceeds from your reverse mortgage, tax-free. And then you have a higher income on social security, taking it at 67 instead of 62, you’ve left your assets alone to continue to grow and compound interest. So, in the financial planner world, they run what’s called a Monte Carlo simulation. And it shows as I said a while ago, the numbers don’t lie. It shows every scenario that if you utilize the reverse mortgage proceeds in retirement first, leave your assets alone to continue to grow at the end of life, what you have left, what they call “legacy” to pass down to your children, your assets that are leftover are higher than if you depleted your assets. When you take your assets out in a down-market, you’re locking in losses. Also, on a 401k, that’s differed interest, no I mean, deferred taxes not tax-free. So, when you take it out, that’s when you get taxed and then all of a sudden those assets deplete really quickly. So, it’s just worth talking to your tax advisor and financial planner to run those numbers especially we talked about the other day, Kelsi, this is absolutely not the loan of last resort anymore. I’ve run out of all of my money. Now. All I have left is my equity, and I’ve got to tap into that. Now, the financial advisors are advising exactly the opposite. Tap into your equity first, and then use your assets later. You’ve got more money left over.
Kelsi: Brilliant. It’s brilliant.
Scott Stearns: It’s just numbers, really. It’s just having to reprogram your brain and your thought process after all these years to look at the numbers, which I said a while ago, the numbers don’t lie, to look at the facts of the matter and say, “Wow, this is different than what I thought it was.” And it’s fully insured and it’s a non-recourse loan. And I heard somebody say, one time, “Don’t believe everything you think.” So, you may be thinking a certain way about something and it’s just really not true. And it’s not that you’re not smart about it, it’s just outdated information.
Sarah: Right. You only know what you know. So, yeah.
Scott Stearns: Exactly, yeah.
Sarah: Like you said, “Don’t trust what you always think.” I’ve got one more question. Oh, Melissa said, “The invitation is open. Come on to the new house.”
Scott Stearns: I’m ready. It’s coffee and soup season now. Too bad, I don’t know if you went outside yet today but-
Sarah: Oh, it’s a big difference today.
Scott Stearns: Thank you, Melissa. Oh, I need a refill right now.
Sarah: Look at John. He’s a little bit of a heckler here, “What great legs big daddy has.”
Scott Stearns: He’s jealous of my skinny, really pale white legs.
Sarah: That’s it. Okay. I’ve got one question here. I just wanted to make sure we get all the questions in. Daniel wants to know if someone experiences a long-term care need and is trying to spend down assets to qualify for Medicaid, are the funds from reverse mortgage counted? That’s a hearty question.
Scott Stearns: So, it is, and thank you, Daniel, for that question. And I have actually had some clients get with their tax advisor use a lump sum. In this particular case, they pulled out a lump sum of $100,000, paid cash for a long-term care policy. And if you’ve looked at any numbers on long-term care expenses, they can easily quickly go into the five, six, seven, 800,000, a million, $2 million range. Healthcare is very expensive, especially in the long-term care arena. So, that is one of the things, I’m the reverse mortgage loan officer, but that’s one of the things that you would definitely, I would refer you to the tax advisor to do that transaction strategically to get that investment into a long-term care policy. So, it does not impact Medicare benefits.
Scott Stearns: Thank you for that question.
Kelsi: I was wondering if Daniel was listening.
Scott Stearns: They put me on the spot and I’m out of coffee. I don’t…
Sarah: We’ll conclude here with one final question, which is, how did the disbursements work? Do you get a lump sum? Do you have a partial sum, monthly payments? What are the options?
Scott Stearns: Actually? Yes.
Sarah: Yes all?
Scott Stearns: Yes.
Sarah: All of the above?
Scott Stearns: All of the above. Yes. Sarah, you already, you answered the question. So, you can get a lump sum. For example, we paid off the $125,000 dollar loan and eliminated that payment. So, we had a lump sum of $125,000. We left $24,000 in that example, in the line of credit that they can draw from later. They could turn around a month after we closed and eliminated their payment and they could draw that $24,000 off in a lump sum if they wanted to. I had one particular lady, her husband passed away with no life insurance, but she had a paid-for house. So, what happens in that situation is, she lost her lower amount of social security income and picked his up. His was the higher amount, but she’s still losing one of her sources of income. So, all of a sudden with a paid-for house, she didn’t have enough money to live off of. So, what we did for her is her car had broken down. It was going to be more expensive to fix it than it was worth. So, she had bought a new car for $24,000 which is not much for a car these days, but in fixed income retirement and limited income, that payment was killing her debt ratio. So, she was going into debt every month on credit cards just to live. And then, those are to going to cap out and have limits and she’ll be cut off. So, we paid her car off, we paid two credit cards off, and then we gave her a monthly income of I think, $1,500 a month on that particular one. So, now she’s got her income from the reverse mortgage tax-free coming in beside her social security income. Now, she’s got a little over $3,000 a month with no other expenses and she can live comfortably. So, a lump sum, monthly income. There are clients that do not owe anything on their house and they open a reverse mortgage line of credit with a balance of zero, and it can never be revoked. And so, if they need it later on in life, or they’re setting it up now at 62 and they’re still working and making enough income, they’re just getting it in place now because what we were this close to that lady that previous example of her not qualifying at all. So, she and her husband had talked about it before he passed away, but they never did it. So, then when her income left and she only had his income, one of the crucial requirements is you have to have enough income coming through to pay your taxes on your house and to pay your homeowner’s insurance. And then she had a homeowner’s association that she had to pay as well. Garden home community that kept up the exterior and the lights and the signage and things like that. So, you have to maintain the home because just like any other mortgage, the home is the collateral for the loan. So, she was this close to not qualifying at all because she didn’t have enough residual income to pay for those things. So what we did, she was 80 years old, still paying property taxes. So, we got her together and took her down to the courthouse and filed for her property tax exemption, and eliminated her property taxes. So, then all she had left was insurance and homeowner’s association and she was able to qualify.
Scott Stearns: Yeah.
Sarah: That’s really helpful.
Kelsi: That’s amazing. Let me ask this. It’s not… I didn’t prep you for this, but I just want to clarify before we end the live. So, you do pull the person’s credit in order to see if they qualify for the reverse mortgage, but their credit score doesn’t necessarily determine whether they’re qualified, right?
Scott Stearns: Great point. Yes. We do have to have a credit report. The reverse mortgage program does not care what the credit score is, but we still have to have the report because it may show a lien or a judgment that we have to satisfy out of the proceeds of the reverse mortgage along with paying off the balance of their mortgage or whatever. Because we have to have the first lien position on title. So, we still have to pull a credit report, but the score doesn’t matter. So, if they’ve already gotten in trouble and they’re not able to pay their bills on time and their scores are suffering and they’re finally realizing, “Hey, in that case, this is the loan of last resort,” the credit score doesn’t matter.
Kelsi: Good. Perfect.
Scott Stearns: Great question. Thank you.
Sarah: Yeah, Kelsi, that’s a good one. Well, that about wraps it up here and we really appreciate… Gosh, we still got people making comments. This is great. LaVon said you did a great job explaining reverse mortgages.
Scott Stearns: Well, thank you, LaVon. And I will repeat, if anyone wants that eight-page brochure, just get with Kelsi or Sarah and let me know. And I’ll put those in the mail to you.
Sarah: Yeah. Let’s go ahead and put your contact information up here too. You could go ahead and reach out to Scott at (205) 908-6993. Scott with MortgageBanc. Well, this was great. Well, I’ll tell you, we normally end with a game, but today we’re going to do things a little differently. We’ve been running all this month, a live scream giveaway, and we’ll pop it up here. We had a lot of people participate and all they had to do was share our Marketing Mix broadcast and tag us with the #MarketingMix. And we have a winner that we wanted to announce today. And I hope they’re still watching. But I did want to just do a quick costume change here.
Scott Stearns: Nice.
Sarah: Here we go.
Kelsi: I love it.
Sarah: It looks incredibly goofy, but here we are, but I’m going to do a little quick drum roll because our winner is, and I hope you’re watching, LaVon. LaVon is the winner of a hundred dollar Amazon gift card. You could spend it however you want. Halloween candy or go on a shopping spree, but you just earned a hundred dollars, an Amazon gift card. We’re going to get that right out to you. So we just want to thank everyone for participating and sharing our broadcast and sharing the love. So, it was great. And I get to get this goofy thing off.
Kelsi: Should have had Scott do the drum roll for you! We have a drummer in the house.
Sarah: I didn’t know if I banged on my desk if my microphone was just going to go haywire, but… Anyway, that’s a wrap. Scott, we sure thank you for your time. This was very, very informative and I know a lot of people really got some good information out of it, so we sure appreciate it.
Scott Stearns: I hope so. And I hate, we missed Glyna. I told Kelsi before we went live, I’m not totally sure that their power’s out. I think Rob just forgot to pay the bill.
Sarah: Yeah, right. I mean, we were kind of using it loosely in quotes like, “Sure. Power is out.”
Scott Stearns: Power is out, yeah.
Sarah: All of us have power.
Scott Stearns: If John Chamber is loaded, he could take him a check over there and get their power turned back on.
Sarah: Right, yeah. John, you need to get on that.
Scott Stearns: Yes, big daddy.
Sarah: Oh, goodness. Well, thanks again. Don’t forget next week we’ve got Biz Talk with Heather Davis, which is going to be another good one and always tune into our Marketing Mixes live every Tuesday. So, thanks again. And until next time, we’ll see y’all.
Scott Stearns: Thank you.