Reverse Mortgage Radio Show 12-14-17
Are Home Equity Conversion Mortgages expensive? Listen now to hear Bruce go over the actual charges that you could have if you decided to take out a reverse mortgage.”
Are Home Equity Conversion Mortgages expensive?
KLZ's Ask the Experts proudly introduces Reverse Mortgage Radio, hosted by reverse mortgage
specialist Bruce Simmons. For over 14 years, Bruce has delivered home owners across the front range from costly monthly mortgage payments, relieving
financial stress while providing additional income for retirement. Bruce wants you to learn the truth about reverse mortgages so you can make an informed
decision for your retirement years. This is Reverse Mortgage Radio.
Why don't you break down, honey, and give me just a little bit of that money?
Bruce Simmons: Hello, and welcome to Reverse Mortgage Radio. I'm your host Bruce Simmons and I'm very glad that you could join me today.
We've got a great topic today. You probably have heard, reverse mortgages are expensive. We're going to talk about that. We're going to talk about
closing costs and we're going to answer that question for you.
Before we get there, though, my name is Bruce Simmons. I'm the reverse mortgage manager with American Liberty Mortgage and I always like to start out,
to clarify what a reverse mortgage is. Like we talked about last week, FHA, reverse mortgages are mostly FHA reverse mortgage loans. There's about
one percent of the market that's not. Those are for higher valued homes like a million dollar plus.
Anyways, a reverse mortgage is a loan that's specifically designed for people who are 62 and over, that allows you to convert a portion of the value of your home into tax free income that you never have to pay back as long as you live in your home. You do have to pay your own property taxes and home owners insurance as well as maintain the home and live there, but as long as you do those things you never have to make a payment. It's your house. It stays yours.
You can paint it pink if you want. You could add a room. It's your house. You could pay it off whenever you want. THere's no pre-payment penalty. All of
these things are misconceptions that people have about reverse mortgages and I'm trying to clarify with this show, answer some questions that people
might have in the back of their mind. "I think you have to give the house to the bank or the bank's going to take your house when you die."
We've talked about all these things in the past and you can visit my website and listen to all my past radio shows on the podcast at reversemortgageradio.net,
reversemortgageradio.net, or better yet, just pick up the pone and call me. I'd love to talk with you. My number, direct, is (303)467-7821. I've been
doing reverse mortgages, starting in January, it'll be 15 years.
I started January of '03 doing reverse mortgages. It's been a passion of mine, ever since ... I could never, if something happened where this loan program
just disappeared, I could never do regular mortgages. I would have to leave the industry. I don't know what I would do, sell insurance, I don't know.
I've done that before, actually. Maybe be a professional bowler. That would be fun.
Anyways, we're going to talk, like I said, about the cost of reverse mortgages. Just like anything in life, there's cost to anything. If you want to do
something, you want to go to a movie, there's a cost. You want to say, "Okay. I don't want to pay that cost. I'm just going to get Netflix." There's
still another cost for that it's just not quite as much.
You've got to look at the pros and cons and weigh for yourself. There's kind of a running joke that the answer to most of the questions people ask is it
depends. I'll tell you, it depends on what your situation is. That's why it's important for you to let me know what you're thinking. Why do you want
a reverse mortgage? What's your goal with it? Are you going to be staying in your house? Things of that nature, they're all important in whether or
not this loan makes sense for you.
That's the key thing. Your neighbor might tell you this is the best thing they ever did and you look at the numbers and you look at your situation and
say, "This is a rip off. There's no way in heck I'd ever do this loan." That's your choice, and there are people that say that.
A lot of people say, "This isn't for everyone." I hate when people start off with that. "Reverse mortgage isn't for everyone." No kidding. Home ownership isn't for everyone. Literally, driving a car isn't for everyone.
Maria: Nothing is for everyone.
Bruce Simmons: Exactly. That's my point and that's why I hate it when people start off with, "Reverse mortgages aren't for everyone."
No kidding, but it just depends on your situation, and that's why a lot of the answers I say is it depends, and then once we dig down and I can find
out your situation, then I can give you actually, accurate answers to your specific questions.
Speaking of jokes, though ...
Maria: Uh oh, here we go.
Bruce Simmons: What do you call a bear with no teeth?
Maria: A bear with no teeth, I don't know.
Bruce Simmons: A gummy bear.
Bruce Simmons: These are great jokes that you can tell your kids at Christmas. Come on.
Maria: I need to find that sound effect, that ...
Bruce Simmons: Yeah, or ... The trumpet. Okay, let's get back to the topic at hand. We're going to talk first about the actual cost, and
they can vary. Costs can vary dramatically from one loan to the next. It depends on how interest rate sensitive you are. We mentioned last week, just
near the end of the show, just kind of as a side note, I should have talked more about it, if you wanted a lower interest rate or a lower margin, you
could maybe pay more in upfront costs, because lenders typically make money on the interest rate that they charge and when they sell the loan a higher
interest rate is going to garner more money from the investor than a lower interest rate loan would.
In other words, if you have a regular mortgage and you're being charged six percent, that mortgage is worth a lot more in the form of cash flow for anybody
servicing that loan, than a four percent mortgage would be. It works the same way with reverse mortgages. The way my company works is we close the
loan in our name. I work for American Liberty Mortgage here in Denver, and then we sell the loan.
We sell it to a couple ... There's a couple different reverse mortgage companies that just do ... They specialize in servicing reverse mortgages. You're
still my customer. I don't give up on you that easy. You don't get rid of me that easy, either. You're stuck with me as your loan rep no matter who's
servicing your loan, who the statements come from, but if you have a question, you pick up the phone and call me.
When we sell that loan, a loan that is $150,000, let's say you're paying off a big mortgage and we're making a loan to you for 150,000, we're going to
make more on that loan when we sell it than we would if you took out 10,000 up front, because we're getting paid a certain percentage on the loan amount
when we sell the loan.
A $150,000 loan might have lest cost upfront than a $10,000 loan balance. If you own your home free and clear and you're just coming to me ... Actually,
I met with a listener last week and she came into the office and we went over the cost and she said, "Holy cow. I'm going to have to think about this,"
and we'll go over all those costs with you. I'm going to tell you dollars. We're going to look at things. This is a specific situation, but it just
depends, because I have to charge her a little more.
I can't give her credits or anything like that because she's only opening up a small ... Taking out a very small amount to start with.
Maria: You're talking about how much of the equity she's wanting to access?
Bruce Simmons: Yeah, how much she takes out at the initial closing. If somebody's taking a whole bunch of money out to pay off a mortgage,
for example, we're loaning you $150,000 upfront, so now there's a loan balance with 150,000. A lender, a company that's going to service that loan
is going to pay us a percentage of that amount.
Maria: It's a little more lucrative for you when it's a bigger loan, and so the fees are a little lower for the customer.
Bruce Simmons: That's right, we credit those back, yes.
Maria: It makes so much sense.
Bruce Simmons: That's right. Now, they've changed since October, too, we don't make nearly as much money as we used to. I used to be able
to give a lot of credits for people. In fact, I've done a number ... Not a number, but a few loans with zero cost to the customer, 100 percent, all
fees paid, period. I cannot do that anymore. I can promise you that. No matter what your situation is, I can't pay all the closing costs, there's no
way, but it depends on whether or not we charge an origination fee a lot of times. Sometimes I could pay a few of the other costs, just depending on
the interest rate you want to pay, again, because if you're being charged a higher interest rate we make more money as well, too.
You might say, "I really don't want to pay those closing costs." I'll say, "We could give you a bigger credit if we did the loan this way, if we set up
a little higher interest rate." I close a loan, actually, like that just last week for these people out on the western slope and they were short. Their
appraisal came in low. We argued, we got it increased by $10,000. I went to bat for them and that's the best that the appraiser would do. Anyways,
they still had to bring some cash to the closing so I said, "If you want to limit the amount of ..."
They didn't care how fast the interest was going to be chewing up the equity. Although, they're going to have a ton of equity still after the loan is done. Anyways, they didn't care about how much they were leaving, so I said, "If you wanted to be charged a little higher interest rate, I could give you more credits," so I gave them a lot more credit for a higher interest rate.
Maria: There's a lot of wiggle room, so to speak, to customize your situation.
Bruce Simmons: Yes, customize is a great term for it. It's very customized. Yes, that's a great point. Basically, let's talk about the
actual cost. First of all, I break the cost down into three categories. Number one is the upfront mortgage insurance premium. All home equity conversion
mortgages, which is the FHA version of the reverse mortgage, have mortgage insurance. All FHA loans, period, have mortgage insurance.
The mortgage insurance protects the lender. What they do is, let's say, especially with reverse mortgages, if your loan balance is getting larger and larger
and larger over time. There's a possibility you could owe more on the house than it's actually worth.
In that situation, as long as you're living there and paying your taxes and insurance and maintaining it, it doesn't matter. You can live there for as long as you want. However, when you leave the home, you don't want to leave a debt beyond the value of the home to your heirs. What happens is, mortgage insurance will kick in. Basically, the lender will ... The heirs will give the house to the bank. They have that option. They walk away free and clear.
You don't leave a debt, ever, to your heirs. They walk away. They don't have any equity but they don't owe any money.
Maria: The mortgage insurance, in a way, protects the heirs.
Bruce Simmons: Yes. That's exactly right. It protects the heirs indirectly. It protects the bank. The bank's not going to lose any money.
The bank will sell the house for whatever they can get for it. If they lose $50,000, they file a claim with the mortgage insurance, with HUD, and they
get that $50,000 back.
Maria: Nobody loses.
Bruce Simmons: Well, tax payers could, although, because this is a tax payer funded program, but actually, that's why, there's a whole
bunch of people who put into this system, they're charged these fees, mortgage insurance premiums, and they don't ever ... There's never a claim against
them. If HUD lost money then the tax payers do but they haven't, so, right now they offset ... Anyways, that's a whole nother topic that's way too
Basically, the bank, the mortgage insurance to pay the bank so the bank won't come after you, your heirs or your estate. There's mortgage insurance, but
there is a cost. You're charged an initial mortgage insurance premium. IMIP, is what it's called. That's two percent of the value of the home, not
the loan amount, the value.
If you have a $300,000 home, that's a $6,000 charge that gets taken out right upfront.
Maria: That's just a one time charge.
Bruce Simmons: That's a one time. You're also charged an ongoing mortgage insurance which is a half a percent of the balance of the loan.
None of these are out of your pocket, too. I want to point that out. All these costs are rolled in or subtracted from the loan balance. If you qualify
to get $150,000, and we subtract all these costs from it, now you only have 140, and the mortgage insurance that's being added on every month along
with interest is actually being added to your loan balance.
You're not paying for it out of your pocket, again. Basically, you get a statement every month and you're going to see two charges. One is interest and
one is mortgage insurance, every month. It's an annual percent but they charge it monthly. That's the initial one. That's the initial mortgage insurance
premium which is two percent of the value of the home.
There's also appraisal, title, closing, all these other fees which are on any mortgage loan. Typically, those are around $2,000 most of the time, say 2,000.
Those are classified as other closing costs, so you've got the upfront mortgage insurance premium, the other cost, and then the origination fee is
the third one.
The origination fee is what goes to the lender, my company, the company I work for, or whoever you're doing the business with. The origination fee, HUD
says, "We can charge you two percent of the value of the home on the first $200,000 of value, and one percent thereafter, to a maximum of 6,000."
Think of it ... Okay, so, you have a $200,000 home. You're going to be charged $4,000, or you could. I should say, you could be charged, because I never
charge the full amount. You could be charged that, then $1,000 for every hundred thousand in value above that to a maximum of 6,000.
Maria: This is the one time charge that goes to the lender.
Bruce Simmons: That's right.
Maria: Okay, I got you.
Bruce Simmons: Whoever's originating the loan.
Maria: This is where you're able to be reasonably priced compared to other companies.
Bruce Simmons: Oh, yeah, mm-hmm (affirmative), yep. Sometimes, a lot of times, I don't have to charge any origination fee. It just depends
on the rate that you want to pay, and we talk about all this, too. I used that term a couple times. You don't pay anything. It's not the rate you're
paying, because you don't pay it. It's the rate you're being charged.
Maria: It comes out of the equity, not your pocket.
Bruce Simmons: That's right, thank you. That's exactly right.
Maria: Once I understood that, all of a sudden the reverse mortgages sounded a lot more appealing.
Bruce Simmons: Yeah. There's those three upfront charges, then there's the ongoing fees which are the interest rate you're being charged
and the mortgage insurance, the half a percent of the loan balance per year. Just as an example, and I'm going to keep the numbers simple. Let's say
you have a value of a $300,000 value. You have a $300,000 value home. Your initial mortgage insurance premium is going to be $6,000.
Other closing costs are going to be right around 2,000. Sometimes, it might be 2200, 2100, 1900, right around 2,000. The origination fee on that $300,000
home can be $5,000. You're looking at closing costs, in that scenario, at $11,000. Excuse me, 13,000.
That's not out of your pocket, but it's still costs. If you could cut ... You can't do anything with that mortgage insurance premium. No matter what somebody says, the lender does not get any of that. It goes to HUD. Some people might say, "That's lenders just charging that." No, it goes to HUD.
The $2,000, these are all what's called pass through. You might want to look at that. If somebody's quoting you at 2700, in Colorado, if you live in Colorado,
I know most people are in that 2,000 ... If you've got an expensive home it might be closer to 22 or 23 because sometimes the appraisal is more. If
you live in Boulder, the appraisals are 700 to 750 compared to 600 here in Denver.
A lot of people say, "$600 for an appraisal? I remember when it was 350." Yeah, that was probably not an FHA appraisal and that was probably prior to the
financial collapse. After the financial collapse, they created something called the Home Value Code of Conduct, HVCC, that's what the bill was. It
requires lenders to go through what's called an appraisal management company.
This appraisal management company, I can't talk to appraisers anymore. I contact the appraisal management company and say, "Hey, Joan Smith at 123 Main
Street in Arvada wants to get a reverse mortgage. Please find an appraiser for her." They have a pool of appraisers. They contact the appraiser. The
appraiser contacts Mrs. Smith and they work it out.
Mrs. Smith doesn't have to pay. I don't collect any money upfront, never. Well, not never. If you tell me you have a $400,000 home and I do some research
and I say, "I think it's closer to 300," and you say, "No, it's got to come in at 400 or I'm not going to do the loan," I'm not going to put out 600
bucks on my own, out of my own pocket to do an appraisal on a home that I know is not going to appraise for that amount.
You can cancel at any time, and I'm not going to come back after you for the appraisal fee. It has to be a reasonable fee. In that situation, I'd say,
"Okay, yes, I'll do the appraisal but I want you to pay for it upfront." Other than that, I'm not going to do that. I can't remember the last time
that happened, but anyways, in this situation here with the $300,000 home, the $2,000 are all what's called pass through fees. That's fees that we
actually pay to the appraisal management company.
We actually do have a ... A lot of times, a processing fee is junk. That goes to the lender. I don't charge a processing fee. I do charge what's called
a document preparation fee which is typically 175 to $200, that goes to a third party company, and we actually pay a company called Bay Docks. The
investors require we use this company to prepare all the final papers.
Anyways, those are the fees. Now, let's ask the question, is it expensive? Wait, wait, wait, wait, wait. Hold up. Before we ask that question, let's say,
"Expensive compared to what?"
There's an interesting book that I've got here. It's called Understanding Reverse and it's from an author that I took a class with out in San Diego a couple
months ago. Guy's ... He's incredibly smart. He's a lot smarter than I am. He didn't get a D in 10th grade geometry. His name's Dan Hultquist, and
I'm going to ... What I'm going to do is, he's got a new book. This is 2017, so this deals before the rules changes just a couple months ago.
I'm going to order the new book and I'm going to get three or four extra copies or five, and I'm going to offer this as a freebie to people, I think, to
the listeners and the show. Maybe ... Yeah, some time in January I'll be looking to do that, but he talks about ... He answers these questions in here.
He says, "Is a reverse mortgage expensive? That's the key thing." He says, "Basically, you have to ask yourself these questions." Will the home appreciate?
How long do you anticipate keeping the reverse mortgage? Are you paying off an existing mortgage with the proceeds from the loan?
All of these factor in, and I'm going to touch on them real quick here. I know we're probably getting a little close on time, but basically, is it expensive
compared to what? You can compare a reverse mortgage to, say, a long term care plan. You can compare it to other mortgages but it doesn't really come
into play because other mortgages require a payment, this one doesn't.
It can even generate income. This is, really, a unique product that is difficult to compare. There's no other financial tool like it, and that's the way
I look at it. This is a financial tool. Let's ask these questions, just to give a little perspective to expensive. How much will the home appreciate?
If your home's worth $300,000 now, and let's say you're getting a reverse mortgage for 150,000 so we're loaning you 50 percent of the value.
You keep this reverse mortgage for, let's say, 15 years. Now, your loan balance is $200,000. Let's say, probably even more like 250,000, but the value
of the house has dropped. Let's say we have another blow up in the economy. Now your house is only worth 150, and you decide you want to get rid of
... You have to leave the house at that time.
Let's look at this. You got a loan for 150. Your house is only worth 150, so you're not ... You actually got a loan for zero cost, because you're not responsible
for anything beyond the value of the house, so there were no costs to you to get that loan, if that makes sense. That's one respect. Okay, now let's
say the house appreciates to 500,000. You owe 250. You have 250,000 still in equity, and you've had 15 years of no mortgage payment and you were able
to use that extra money for something else, expensive compared to what?
Let's see. How long will you be keeping the reverse mortgage? This is something, too, because, again, if you only keep the loan ... If your costs, let's just keep 10,000 as a simple number, your costs are $10,000 and you keep the loan for just one year. That's an expensive loan. You borrowed 150,000 at $10,000 for one year. That's a pretty expensive loan, but if you keep the loan for 20 years, now it's $500 a year. That doesn't factor in the interest you've been charged over the life of the loan, but, again, you're going to be charged interest on any loan you get. Keep those in mind.
Lastly, are you paying off an existing mortgage? Let's say you're paying off a mortgage with a thousand dollar principle and interest, because remember,
you're still responsible to pay your own property taxes and homeowner's insurance. If you use a reverse mortgage to pay off an existing mortgage where
we pay off your loan, so it saves you a thousand dollars a month in principle and interest, and it costs you 10 or $12,000 to get the loan, you've
made that money back in a year or less.
That's money in your pocket that you can spend. Was it too expensive? Or, you could continue paying on that 30 year loan that you've refinanced three years
ago and you've got 27 years left and you're 70 years old. You're probably going to be paying on it the rest of your life. Is that what you really want?
Those are things that you have to factor in. I'll never, ever forget this lady I did a loan for, probably in 2005 or 6. She lived in a little brick home
in Northglenn. She owned it free and clear. It was worth $200,000. I think, back then, it cost, on a $200,000 loan, the fees were higher then, and
it cost, I think, 12 to 14,000 in closing costs for her. She had Loe Gehrig's disease and she was an incredibly sweet woman. I couldn't imagine going
through that and maintaining the dignity and personality and just the upbeat outlook on life that this lady had.
She was incredible. I'll never forget her. Anyways, she could sign some of the papers when we first did the loan. A month later when we were closing, she
couldn't. She was not able to sign herself. We had to use the power of attorney. She was getting the money. She owned it free and clear. She said there's
no way she was going to leave that home, period. She needed the money for in-home care, and it just got more and more expensive throughout the loan,
but she only kept that loan nine months before she passed away, but to her, that loan made 100 percent sense.
It made emotional sense. A CPA or an attorney looking at this says, "No, that doesn't make sense. That's not financially smart to do that." It doesn't
matter in certain situations. It was emotionally what she needed to do.
Maria: Right, the value of staying in her own home was worth so much to her.
Bruce Simmons: It was priceless. Yes, exactly, and her family was there. They visited her all the time. It was just incredible. A lot
of times, you talk to somebody, an attorney, a CPA, people like that that are so ... I don't know, left or right brained. I don't know which is which,
honestly, but they don't think of the value of something in that respect. Are reverse mortgages expensive? It depends. My favorite answer.
Maria: No, it makes so much sense because for some people in certain situations, it would be too expensive to make it worthwhile. For
other people, it's a screaming deal.
Bruce Simmons: There you go, I like that, a screaming deal, right here at Bruce's Automotive. Yes, get your screaming deal. No. That's
a good way to put it, Maria, I appreciate that. Basically, and I get going on these things and I forget to tell you who I am. If you've just tuned
in, my name is Bruce Simmons. I'm the reverse mortgage manager with American Liberty Mortgage, right here in Denver. I've been doing reverse mortgages
going on 15 years, and it's all I do.
I love it. I love my customers, and I would love to talk with you. You can call me directly at (303)467-7821. (303)467-7821. My name again is Bruce Simmons,
and visit me online, too. I forget sometimes to promote my website. I spent a lot of money on that website so I'd love for you to go visit ...
Maria: It's a good looking website.
Bruce Simmons: Good, thank you. You can hear my podcast, you can watch testimonials from other customers, you can see me on there doing
... I'm on a couple videos, as well, trying to explain things. It's reversemortgageradio.net is a website. Please visit me or call me. Come by my office.
We're in the Highlands area, my office is. There's no parking, it's terrible parking, but you can come if you can walk there or something.
Anyways, it's great, I'm so glad that you were able to tune in today. I really appreciate you joining me. Have a great afternoon.
Call a reverse mortgage specialist Bruce Simmons of American Liberty Mortgage directly at (303)467-7821 to begin drawing equity from your home. Bruce will come to you anywhere in the front range for an in person, no obligation consultation. Learn more about reverse mortgages and watch testimonial videos on reversemortgageradio.net.