In this episode of The Same Day Podcast, Mat Zalk sits down with Laura Phillips, Reverse Mortgage Specialist and Mortgage Loan Officer at MAC5 Mortgage, to discuss the ins and outs of reverse mortgages. They explore how retirees can leverage this financial tool, address common misconceptions, and explain who benefits most from this product. Laura also gives valuable insights into the modern safeguards in place to protect borrowers and why reverse mortgages aren’t for everyone.
Reverse Mortgages Simplified: How To Make Your Home Work for You With Laura Phillips
Laura Phillips is a licensed Reverse Mortgage Specialist and Mortgage Loan Officer at MAC5 Mortgage with over 30 years of experience in real estate lending. She specializes in helping homeowners 62 and older understand and navigate the reverse mortgage process, providing tailored financial strategies to access home equity for retirement needs. With a strong background in affordable housing, traditional mortgages, and reverse loans, Laura’s expertise spans both the technical and personal aspects of home financing, ensuring clients make informed decisions about their financial futures.
Here’s a glimpse of what you’ll learn:
- [06:06] Laura Phillips explains the concept of reverse mortgages and how they differ from traditional mortgages
- [09:06] The impact of age, home value, and equity on reverse mortgage options
- [12:28] What properties qualify for reverse mortgages?
- [14:34] Key advantages of reverse mortgages for homeowners 62 and older
- [17:18] How the reverse mortgage line of credit works and its unique features
- [21:06] Negative myths and misconceptions surrounding reverse mortgages
- [25:09] What happens to reverse mortgages when homeowners pass away?
- [29:13] The relationship between reverse mortgages and interest rates and how rate changes affect borrowers
- [32:50] Risks to evaluate before committing to a reverse mortgage
- [37:46] Historical mortgage trends and their modern implications
In this episode…
For many homeowners approaching or enjoying retirement, the question looms: how can you make the most of your home’s equity without risking financial stability? Reverse mortgages are often misunderstood, yet they can be a lifeline for those seeking to maximize their financial potential during their golden years. But how do they work, and are they the right choice for everyone?
According to Laura Phillips, a seasoned loan officer, reverse mortgages allow homeowners 62 and older to access their home’s equity while eliminating the burden of monthly payments. She highlights that the product has evolved significantly, with safeguards now in place to protect borrowers and their families. Modern reverse mortgages offer flexible options like lines of credit or structured payments, allowing retirees to fund home repairs, cover medical costs, or even invest in new opportunities.
Resources mentioned in this episode:
- Mat Zalk on LinkedIn
- Yonatan Schmidt on LinkedIn
- Walter Bowser on LinkedIn
- Keyrenter Property Management
- Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
- Keyrenter Property Management email address: [email protected]
- Laura Phillips: Website | LinkedIn | Email
Related Episodes
- “Paving the Way for Affordable Housing in Urban Communities” with Devin Howland on The Same Day Podcast
- “Revitalizing Communities Through Multi-Concept Restaurant Development” with Elliot Nelson on The Same Day Podcast
Quotable Moments
- “Reverse mortgage is for anyone over 62 to access home equity without worrying about mortgage payments if retirement income won’t support it.”
- “A reverse mortgage can help preserve assets with financial planners, allowing seniors to fund their life without touching their portfolio.”
- “It’s not your grandmother’s reverse mortgage; it’s a kinder and gentler product that protects seniors by putting both spouses on the loan.”
- “If you’re moving in less than five years, a reverse mortgage might not be in your best interest due to its costs.”
- “It feels like my entire life at this point. I’ve been in the mortgage industry for over 30 years.”
Action Steps
- Understand the basics of reverse mortgages: These loans differ from traditional mortgages, particularly in their focus on asset value rather than income, which can be crucial for those planning their financial strategies post-retirement.
- Evaluate your financial situation: This step is vital because reverse mortgages are particularly beneficial for those with limited retirement income or who need to leverage their home equity without taking on additional monthly payments.
- Consider future living arrangements: Reflect on whether you plan to stay in your current home for the next five years or longer. Reverse mortgages are not cost-effective for those planning to move in the near term due to associated fees.
- Consult with a financial advisor: Confer with a financial advisor to explore how a reverse mortgage could fit into your broader financial plan, especially if you have substantial assets you wish to preserve. A reverse mortgage can help keep your portfolio intact for inheritance purposes while providing liquidity for everyday expenses.
- Understand the implications for heirs: Educate yourself and your family about what happens to the home and the mortgage after you pass away. This ensures heirs know their options concerning the home and any outstanding mortgage balance.
Sponsor for this episode…
Keyrenter Property Management:
This episode is brought to you by Keyrenter Property Management.
Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.
The team helps clients build wealth while taking the headache out of property management.
That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.
To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].
Episode Transcript
Intro 00:04
Welcome to The Same Day Podcast, where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.
Mat Zalk 00:20
Mat Zalk here. I’m the host of The Same Day Podcast, where I connect with top business experts and real estate leaders. Devin Howland was on a while back talking about economic development in Fayetteville, Arkansas, which is obviously through the roof. We also had Elliott Nelson on, owner and founder of McNellie’s Group, discussing community development through restaurants and bars in Oklahoma City and Tulsa. Today’s episode is brought to you by Keyrenter Property Management. At Keyrenter Property Management, we are a full service property management company helping our clients buy, renovate and operate real estate assets. We help our clients build wealth while taking the headache out of property management. That is why no matter what rental you have single family homes, condos, townhouses or apartments, we have the management solutions for you. Go to keyrenterpmc.com or email us at info at keyrenterpmc.com. Today’s guest as you are going to hear about is Laura Phillips. She’s a licensed reverse mortgage specialist with a mission to guide people through the entire reverse loan process so they feel confident about the options available for the next 30 year financial strategy. Laura’s got 25 plus years of experience in real estate lending, and that experience has taught her that it’s not just a person’s house, it’s their home, and it’s one of the most significant financial commitments a person will make in their life. She helps people devise strategies to enjoy their best years in their family homes. Welcome to the show. How are you?
Laura Phillips 01:48
I am fabulous, how about you? .
Mat Zalk 01:50
Good. Tell me a little bit about your Thanksgiving before the show I was asking you about. You asked me about Thanksgiving, and I was telling you about the craziness in my family. But tell me. Tell me how your Thanksgiving was.
Laura Phillips 01:59
I’ve been doing Thanksgiving with one family for the last 30 years. Same family. And so it’s kind of an extended family. I become aunts to their children. And so there were 18 of us. No dogs this time. So it was just 18 humans. There were three turkeys, a ham, a salmon, a big salmon steak and somebody roasted pork. There was so much food on the ash. It was amazing.
Mat Zalk 02:26
That’s how I always feel. It’s just like way too much food.
Laura Phillips 02:30
It was. It was. But so much fun. I had the best time. I met some new people and we just had great conversations the whole evening. So I was very happy.
Mat Zalk 02:39
Thanksgiving. Friday morning leftovers are the way to go.
Laura Phillips 02:42
I think I came home with enough leftovers to make a turkey, but there was still plenty for everyone else.
Mat Zalk 02:48
It sounds. It sounds like it with three turkeys, a ham, a salmon and a pork, whatever belly or whatever. Like that. That’s a lot. Let’s let’s kick off a little bit. Tell tell us. I’ve heard kind of what a reverse mortgage is probably 50 times in my life, and I can never quite remember it when somebody asks me, hey, what’s a reverse mortgage? So let’s start with simplifying. And it is a simple process or simple product rather. But like what is a reverse mortgage?
Laura Phillips 03:16
Well, reverse mortgage is designed for anybody over the age of 62 to be able to access their equity in their home and not worry about having to make a mortgage payment if their retirement income wouldn’t support it as well. So we see a lot of seniors these days getting getting rejected from doing helocs or getting a regular first mortgage and a reverse mortgage would be another excellent way for them to tap their equity if they wanted to.
Mat Zalk 03:41
But so what’s the difference between a traditional mortgage? You say, here’s my collateral, it’s the house, right? Give me 80% or whatever of the house and you give me that cash. And then over the next 30 years, I’ll give you back that principal plus interest. So when somebody is 62 and they don’t have income, they can’t prove to the bank that they are going to be good for the payments for 30 years. Is that the general logic?
Laura Phillips 04:11
Kind of it’s an asset based loan. So the forward mortgage, which is the one that we’re all familiar with, it’s how we buy our homes and live in them. You are qualified more on your credit score, what you’re making in income and what you have in your reserves, your savings accounts with a reverse. It’s an asset based mortgage, so it’s really based more on the home than it is on your income. The thing that’s most important is, is they be able to qualify. The person who’s trying to get a reverse mortgage be able to qualify for 1/12 of their taxes, their home insurance, and if they’re in an HOA situation. So that’s only 1/12, which is a lot easier to qualify. Plus adding on to it, a mortgage and principal and interest. So there’s no forced principal and interest payment. You don’t have to make it.
Mat Zalk 04:48
What does that mean? That 1/12. So they have to have enough income to pay 8% of their. Okay.
Laura Phillips 05:06
So of their. I keep it I keep stepping on you and I apologize. No. So 1/12 of it would be if we take the total of your taxes, let’s say there are $2,000 a year and your and your HOA is 1000. So the total would be $3,000. And there’s no home. There’s no HOA involved. Your homeowner’s insurance and taxes. We would take that 3000, divide it by 12, and that we want to make sure that they had enough funds to have that in their income coming in. So that’s where people who are just getting Social Security or they’re not, they haven’t saved as much as they would like to, which seems to be a problem for all of us, to be honest with you. I don’t think anybody’s expecting to live as long as we are now going forward after retirement, so that makes it easier for that person 62 or years or older, to be able to access that, that, excuse me, equity that’s in their home.
Mat Zalk 05:54
Got it. And so they they are earning $300 a month. Their expenses in this scenario is 3300 times 12 is 3600. They meet the 1/12 requirement. So that means that means that there’s additional they can access. Then the the value of their house, some of the equity in their house by doing a reverse mortgage.
Laura Phillips 06:16
They can. And that equity is limited to it’s like think of it three moving gears. There is your age, how old you are. There’s the value of the home, less a mortgage against it. And then there’s the interest rate. So all three of these gears move together to be able to figure out exactly how much equity you can tap at any given time, but the average would be about 45%. This is just numbers off the top of my head. Think of your old logarithm tables from from high school. You went down, looked over, and there in that column that told you what the answer was. Well, it’s very similar with HUD. So it’s about 65% is the maximum that you can get. And of course, as you get older, you’re getting closer to that 65% of what you can take in your equity.
Mat Zalk 06:59
And so somebody wouldn’t want to do a forward mortgage because potentially they wouldn’t qualify.
Laura Phillips 07:06
There’s a good chance they won’t. Interest rates are still fairly high. As much as we’d like to have hope they would come down from the from the Fed’s lowering prime. But that didn’t really happen for interest rates. It does happen for reverse mortgages or adjustable rate loans. Obviously credit cards and car payments all went down, but the actual fixed rate didn’t. Yeah.
Mat Zalk 07:28
Yeah, it is there when you kind of paint the scenario of a $2,000 in taxes and, and a $1,000 in, in other fees associated with the home insurance, for example. I think you said it it makes me think of a house that’s not that expensive. So are there are there specific Types of properties. Kinds of properties that would typically qualify for reverse mortgage. Is there a threshold below which a reverse mortgage wouldn’t be appropriate? I know that was an example. I know that was an example I had.
Laura Phillips 08:05
Yeah, I can do. We have jumbo reverses in answer to your question. We do have jumbo reverses. They go up to $4 million. Wow. I guess I should let you know that reverses are only on the primary home, so? So that’s a big deal. However, you could, whatever you do with those funds that you’ve taken out is your business. Nobody’s going to ask you where you’re going to go, what you’re going to do with that money. The only concern is, is that you might not invest it in an annuity, but yet you still can.There was a in the early days of reverse, have been out for a long time. So in the early days there was a lot of mismanagement, which is probably true of just about any loan program that has ever come out. And so there were people that were unscrupulous, to say the least, that would do a reverse and sell an annuity at the same time, and double dipping for income, but maybe not beneficial for that party. So that became HUD’s biggest concern was are you going to do an annuity after that? They don’t ask any questions about what you’re going to do with your money.
Mat Zalk 09:08
Interesting. So any any primary residence? I shouldn’t say any because they’re qualifiers, of course, but most the most primary residences, up to $4 million, which is a jumbo product, would generally qualify, assuming that you’re 62 years and older and you have the the you have the income equivalent to, you said 1/12 of the of what you need from A to to pay the fees associated with the house, the ongoing living expenses, your typical.
Laura Phillips 10:12
Fees, whether you have even if your house is free and clear, you’re still paying taxes and insurance, right? Those are still fees that need to be paid. And if you live in a community with an HOA that comes on top of it. So those are the concerns is to make sure that that the party getting the reverse, whether it’s a regular government reverse or if it’s a jumbo reverse, that it is that that party can afford to pay those fees. 1/12 of them, we just add them all up, divide by 12 and say, is there enough income? So if that was $5,000, we would just want to make sure you had $5,000 in income coming in.
Mat Zalk 10:24
Right. And what happens what happens if somebody has a primary already. They’re at the 27th, 28th year of the of their forward mortgage. How does that work when they put a reverse mortgage on to the property?
Laura Phillips 13:13
Well, we can do it one of two ways. I actually have one company that offers a second reverse mortgage. So it’s a HELOC. It’s in behind, and a lot of us have great interest rates right now. We’re not really wanting to walk away from our three ish interest rates. And so we’re all sitting on them and and we’re not wanting to do a refinance and take a six or a seven out to get a cash out. So that’s a great way to do that, especially if you’re not too far away from getting finished with your current first mortgage. The other way is. Is that all? Reverses pay off the first, so it becomes in first position.So if you I mean I think it’s the numbers. Do the numbers make sense to the client at that point? Does it make sense to get rid of it or does it make sense to do a second. Right. And what are the.
Mat Zalk 14:00
What are the what are the main advantages of doing the reverse mortgage? We talked about for specific people. We talked about situations where they can’t potentially get a forward mortgage. Is there a world in which somebody does have enough income? You can imagine the scenario where they paid their max Social Security, whatever that is, $102,000, I don’t even know it. And then for 40 years and they have plenty of Social Security coming in, they could theoretically get a primary mortgage. Is there a forward mortgage? Is there a reason why they would opt for a reverse mortgage instead?
Laura Phillips 14:34
There is, and I see this being used a lot with financial advisors. So they have a really nice assets with the financial advisor, stock portfolio type products. I guess the best example is one that was back east in New Hampshire. They bought Apple in the early days of Apple, nobody really knew what Apple was. They thought it was something you ate. Who you know, what was it, a telephone? Who knew what it was. So they bought Apple and they sat on it all these years. Of course, Apple is now an incredibly lucrative stock to own. And and so they wanted to save that for their children, and they didn’t want to dip into their portfolio in any way or fashion that was going to go to their children. That was their inheritance. They used the reverse mortgage to use to fund their life, to fund what they wanted to do with it. So you bet. I think the best way is to preserve the assets you have with your financial planners. Another good way is to if you have to roll over your 401 s, and how are you going to take care of those or those Roth IRAs and you pay taxes on that money? Is there a better way to avoid paying taxes? I’m not a tax advisor, but I do know that you can offset it either by doing a reverse and pulling that money out to cover the taxes, or you can just take a reverse and take that money out and draw it as you need it, and not necessarily convert your Roth IRAs.
Mat Zalk 15:52
Sounds sounds similar to a HELOC, though in that sense, if you had a paid off house, for example, and you had an IRA that needed that, you needed the cash or wanted to roll over, it had to pay taxes from a portfolio that you were going to sell or whatever. You could theoretically put a HELOC on the house and also get the cash out. I don’t know if you’re always required to pay down principal immediately if there’s a forced thing. I guess there’s not the difference, as I see it now is your interest continues to accrue, and you’re never actually forced to pay back the, the, the principal that you pulled out from a reverse mortgage. Whereas with the HELOC, you’d be at some point you’d be forced to.
Laura Phillips 16:29
You are usually you have a draw period of anywhere from 5 to 10 years, and then after that there is a forced payment. And reverse actually comes in two ways. It comes as a line of credit. So it would be like a HELOC if you think of it that way. Or it can be as a fixed loan. One of the two you can pick either way to to get your funds out.
Mat Zalk 16:47
And so the reason why there’s generally a 45 to 65% loan to value is that it could theoretically go for many, many years without being paid off and the interest would carry on. And eventually the, the, the debt outstanding would be equivalent to or potentially even more, I guess in some way there must be a mechanism to stop it, but potentially more than the than the appraised value of the house. Although I guess when you go from 65% up to 100%, the house is also appreciating and therefore there’s there’s more collateral on the line.
Laura Phillips 17:18
It was great formulas out there all very long. However, you’re absolutely right. The best way had requires that we use a 4% appreciation. That’s a nationwide appreciation for homes. Now there are pockets of area that have seen considerably higher than 4% in some areas that, you know, they’re really happy to get the 4% in the last couple of years. So this is what we use for what your house is going to appreciate as the line of credit has. It’s kind of a nice little product. If it’s okay, I’ll talk to you a little bit about it. The line of credit has an interest rate. Let’s just say 6.5%. Right now it is a margin plus the index okay. The index is the if I hadn’t if I hadn’t have said it, I would have been able to tell you it is the we’ll come back to that figured out. Anyway. The index is out there. You add that to the margin and then they’re running about 6.5% right now. If you were to get a payoff, your first get your line of credit and you had $100,000 of line of credit, that was going to come to you. These are just numbers that are low, but I can work them in my head. So at that point I didn’t really need the money. I had it, but I didn’t have any immediate needs. I was just going to let that line of credit sit there for a year. Well, next year that line of credit will have grown. The amount of money in it will have grown by about the same amount as the amount that you’re paying on interest on the loan that you’re borrowing. So you’re not paying on that line of credit because you haven’t drawn against it yet. However, it’s still growing at about 6.5%. It’s it’s not interest that it’s paying to you, but it’s growth.It‘s literally so next year, instead of $100,000, it’ll be 160, 650,000 106,500. It just grows right.
Mat Zalk 19:04
Is that your access to the line of credit? You have access to that?
Laura Phillips 19:06
Absolutely. Another nice thing about that line of credit that is a little bit different than the HELOC that are out there right now, is if we all remember in 2009, ten and 11 when we had the collapse of the industry, people woke up the next morning and their banks had turned their lines of credit off, even if they hadn’t had plenty of money in there. Sure, there was no more drawing. It was gone. Evaporated overnight. That’s not going to happen with a reverse mortgage at this time. HUD or HUD actually regulates that program and the jumbos mimic it. They are proprietary, proprietary loans, and they mimic those loans and the rules and guidelines. And as it stands right now, it’s written in your contract with HUD. It’s not going to go away. Legislation could change that. But at this point that’s a sweet thing. Sure.
Mat Zalk 19:57
You talked a little bit ago about this, the unscrupulous loan officers that were selling the reverse mortgage and then selling the annuity and and the implication, you kind of alluded to it, but I went through my mind quickly that was that they were double dipping. They would make the fee from the mortgage and they would make the fee from the annuity. And the end user, the consumer was not any better off. And HUD has turned that to make sure that they’re not doing that anymore, because they found that to be not beneficial to the end consumer. Were there? Were there other like reverse mortgages, have had a negative reputation in the past. Were there other things going on that that led to this negative reputation in the market, or is it just was it that one thing or was it also that because it’s a product that’s available to to 62 and older, it just lends itself to a mythology of kind of taking advantage of people that are that are, you know, older, potentially less savvy. I don’t, I don’t know, is it is it just the HUD thing with the reverse mortgage and the annuity, or is it something else?
Laura Phillips 21:06
Well, I would have to say that most seniors are preyed to some a lot of scams these days. So I would definitely never rule that out. I think that’s there for all of us, whether we do a reverse mortgage or not. This product has been out since the Reagan era, so it’s not like it’s a new product. It’s been out for a long time, but I think that there were a lot of oversight that they missed. And one of them was in the beginning, they only put the mail on the loan. They only put the husband of the mail right on the loan. So unfortunately, statistics show that men tend to die a little bit earlier than their wives. And then all of a sudden we had the widow on the street. Literally, she was foreclosed on. Well, that’s really bad press, you know, and that became very bad press all in all. So so they went back in and said, no, no, we need to put both parties on the loan. Does that make sense? And now she gets to stay in the home and she doesn’t lose it. And another good example was over this time period of about 30 plus years, they said, oh, we never thought that we should make sure that the client, the senior, could afford to pay the taxes and insurance. So they never did any kind of income assessment. They just said, you need money. You know, it looks like you can fog a mirror more or less back in the early days, and we got both of them on the party, but they never looked to see if they could. Well, that’s the only way you can get a foreclosure. One of the only ways you can get a foreclosure on your taxes is not pay your property taxes. We all know that property taxes come first period. And so that’s that was a big problem back then. I hear people say, oh my God, they’re horrible. You know, my aunt or my uncle lost their homes. And I would have to say it’s not your grandmother’s reverse mortgage. It’s a kinder and gentler product because they’ve thought about let’s put both spouses on. And if they remarried and they had a much younger spouse, but still make sure that we that we make the ages work. If taxes and insurance be covered and paid, let’s make sure that’s being taken care of. And the last big thing, and I don’t know if we’re going to find this a plus or not, but about eight years ago when when President Trump was in office, he and Ben Carson looked at who was head of HUD back then, looked at the situation and said, we think we really need to shore up of HUD and its MIP program. So we’re going to do two things. We’re going to increase that premium a little bit, and we’re going to lower how much you’re going to be able to take out of your house. So prior to Ben Carson and President Trump taking office back in, what was it, 14, 17? Yeah. That it was 75%. You could get 75% of the value of your home, and you could get it in a lump sum. So they did some statistics and they being HUD did some statistics and looked and said, oh, not everybody used that money really. Well, you know, if you give somebody $300,000, all of a sudden it’s a motor boat. And you know what? Water skis or whatever.
Mat Zalk 24:11
To the casino.
Laura Phillips 24:12
For everyone at all. But it certainly happened. And the money wasn’t being saved to pay the property taxes. Remember, you, you now have to be responsible for those, and everyone was really used to paying it through their mortgage payment. On their first it was escrow. No more escrow. So those were things that that are really bad, bad information about reverses that isn’t out there any longer. It’s going to it really does protect the senior.
Mat Zalk 24:37
So you touched on something that I wanted to to to dig a little bit deeper into. You said when when the husband was only on the mortgage and the husband passed away, and the wife was now left to fend for herself and potentially on the on the street as a result, it it reminded me that we haven’t touched on what actually happens. All of us eventually will die when the husband and now the wife die, the the, the, the lender ends up with the house. Is that right?
Laura Phillips 25:09
Can can, you know and you let’s let’s just backpedal. Just a second. You talked about the House potentially having more of a loan against it then the value and I would say probably I do see that we we, we future pass these loans for 30 years. So a lot of these people are going to be in their late 90s by the time the loan is done with 30 years. And yes, there is a high potential at the age of 90 plus, you’re going to see the loan to value be moved away from in the favor of the homeowner and in the favor of the bank. Absolutely. So there are a couple of things that can happen if if the house is not upside down, doesn’t have it has more value in it than the loan, then the heirs can come in and sell it. They can buy it for themselves.
Mat Zalk 25:57
Off the mortgage.
Laura Phillips 25:57
Probably in this day and age, and they buy it for a portion of the of the loan amount. I believe it is at 95%. So they can if the house.
Mat Zalk 26:07
Is worth 100,000, the mortgage is now worth 95,000. They can buy it for 95% of $95,000, $35,000.
Laura Phillips 26:16
Correct. They can. Right. And these are just like I said, these are just numbers off the top of your head so you can do math.
Mat Zalk 26:21
What’s the philosophical reason behind that? Why don’t they pay 100%? Well, a lot of.
Laura Phillips 26:25
People think they want to leave their house to the kids, and there are a few kids out there that really do want to have mom and dad’s house. Most of my experience so far has been that the kids live somewhere else. They don’t live in this in the state or the vicinity of where their parents are. Or if they do, they have their own home and they’re very happy with it. It’s usually a much more modern home than with their parents have. So they really didn’t want the house that wasn’t what they wanted. The asset would be the funds from the.
Mat Zalk 26:53
But why? Why would HUD allow or the mortgage company, the lender? Why would they allow the house to come in and and be purchased? Or why would they allow the repayment of the mortgage to be only 95% instead of 100%? You owe me 95. You only need 95 grand I lent you, we made. We agreed. I paid you this money. It grew at a certain interest rate. Now you owe me 95 grand. Why? Why accept 95% or 95 grand.
Laura Phillips 27:16
I can’t always speak for HUD’s thinking process. I would love to have a better insight on that. I would suspect it is that they really want family members to take the house. Keep in mind that no lender, including HUD, really wants to own real estate. That’s not their business. They’re not real estate owners.
Mat Zalk 27:34
Got it. So they’d end up having to pay a real estate commission to sell it. They would sit on their books. So yeah. So that makes sense.
Laura Phillips 27:42
And that’s what happens if the house is upside down, which is what means that the loan is higher than the value of the home, then you just kind of, in essence, give the keys back to the bank. And HUD takes it over and they take care of it. They will find somebody to buy it and sell it and move on with it. Now a lot of people want to know, well, what happens to me if I have if Mom and dad die and I have to now. Do I have to cover the difference in the mortgage because it’s being sold for less than the house value? And the answer is no. They are insured by the Federal Mortgage Insurance MIP. So a lot of people go, well, I don’t want nip on the house. I have plenty of value in my home and that’s true. However, you don’t want to have your children and your heirs be responsible for a mortgage later on, like say at 95 where the house is upside down. But they’ve enjoyed the entire living there. They’ve edged out and lived in the home the entire time. And that protects them, that mortgage insurance does.
Mat Zalk 28:36
That’s interesting. So that makes sense. The mortgage the mortgage insurance do can can the children of a person that’s getting a reverse mortgage opt somehow out of the MIP and pay something and just wish you could opt out?
Laura Phillips 28:52
Yeah. No, there is no opting out for it. You could be, in essence close to your deathbed and we still have to pay it. And it is built into the jumbo loans or the proprietary jumbo loans by a higher interest rate. But the same feature of saying that it’s a non-recourse loan is there is just no way of getting out of it.
Mat Zalk 29:13
Got it. Understood. Now that interest rates have been changing, the. You’re right to say that the forward mortgage rates dipped after the fed dropped the rates 50 basis points, and then they kind of stabilized. And even with the 25% dip, they seem to be holding pretty steady. It’s a market like any other market supply and demand. What are you seeing in the reverse mortgage market? And how does the interest rate affect the overall cost of a reverse mortgage?
Laura Phillips 29:43
So I see like I said, remember there was a line of credit loan or a fixed rate. I have only used a fixed rate once in my reverse mortgage history, and I’ve been doing them for quite a long time. So. And that was only because the woman only had so much money, and it was cheaper for her to use a fixed rate to purchase a home than to do the line of credit. So I would say nine times out of ten when people come to see me, they’re they’re opting for the line of credit. They don’t need it all. They they just want to get some of the equity out and start growing it, using it as needed. You know, the roof needs to be repaired. I need a new hot water heater. Sure, we want to take the the family on a dream vacation because I’d rather build memories than not and and just give cold hard cash at the end so that line of credit is much more popular. And with that, it’s tied to what happens with Prime. So as Prime goes down the line of credit, interest rate goes down.
Mat Zalk 30:39
So is that is that is that the benchmark rate that you were talking about earlier? There’s a the prime. It’s prime plus a spread. Correct. Prime and prime is at five and a quarter right now. It was at something like that.
Laura Phillips 30:52
My most current one was at six and a half.
Mat Zalk 30:55
Got it. So the spread is the spread is relatively thin.
Laura Phillips 30:58
It is well with me I can’t I can’t speak for everyone else. Yeah, we are commission paid people. So yes, absolutely.
Mat Zalk 31:08
Do do the fees that a borrower would incur get paid out of the line of credit, or do they get paid directly to you? So if somebody is taking, let’s say, 65% of their house value is equal to $100,000 and they want to pull that line of credit immediately, do they pay? Do they get $100,000 and then pay the fees out of that to you, or is that paid through HUD? It goes on a settlement statement, I presume.
Laura Phillips 31:34
All fees are paid out through are rolled into the to the loan. So so we the only thing that I personally don’t roll in and I think that’s going to be based on companies and their and their company policy is the credit report and the appraisal. Those are out of pocket costs that the client would pay for. I they have to pay for a class. They do need to take a class for reverse mortgage to be able to get to it. That needs to be paid out of pocket and is not rolled into the closing costs. So the class fee is maybe $200 an hour.
Mat Zalk 32:05
That covers some of those differences between the forward mortgage and the reverse mortgage. You still have to pay. We’re not escrowing your property tax, we’re not escrowing your insurance costs, etc.. That makes sense.
Laura Phillips 32:13
They want to make sure you really understand how you can get into a foreclosure situation. And it is exactly what you said the property taxes.
Mat Zalk 32:20
But so if the prime rate jumps, then the then the monthly interest associated with that line of credit say I’ve accessed that $100,000, now I’m going to pay 6.5%. But tomorrow, if the rate drops, I’m going to pay 6% or whatever your spread is fixed, the prime rate changes, right? Got it. Right. Do you think that there are other potential downsides or risks that homeowners need to be aware of before they consider a reverse mortgage?
Laura Phillips 32:50
I would say it’s not for everyone. So. So I would agree that that’s probably a true statement. If you think you’re going to move in the next less, less than five years, five years or less. It’s an expensive loan, I’m not going to lie. Mortgage insurance is not cheap. closing costs are closing costs, but with a lion in the room or the elephant in the room is the mortgage insurance. And so the longer you have it, you’re in essence your Apr. The cost of borrowing money goes down with each year. So if you’re going to sell within the next five years, or you think you’re going to move to a different type of retirement situation and get out of the two story house and into a ranch, I would say it’s not necessarily in your best interest, but again, that’s the client’s decision. I haven’t seen well, I did just just recently, I did have a client that thought he was going to move in the next six months, but he really wanted to reverse to not really sure what he was going to do with a reverse, to be honest with you. I’m not sure he was really clear, but in the end he decided against it. And I thought that was his best decision because the cost was so much that he was taking money out of his pocket at that point.
Mat Zalk 33:58
So he ends up paying theoretically, had he gone through with it, he ends up paying a bunch of fees for closing the appraisal, title search, the commission associated with the loan, and then and then he takes out the money. In six months, he goes and sells the house. He pays a real estate broker. Somebody else pays the appraisal because they’re buying the house if they want to, if they want to borrow also. And ultimately, he pays back that line of credit at a higher interest rate, whatever, plus interest rate.
Laura Phillips 34:27
But he’s lost in essence, the cost, the hard cost to do that reverse mortgage. And let’s just say it was $10,000. He’s not going to recoup that. I mean, you know, maybe if the house value went up 10,000 in the six month time period, but let’s assume it doesn’t at this point. Those are hard costs that would be lost. The longer you stay in the home. Those hard costs are diminished by each year. So it makes it a cheaper loan. Amortized. Amortized. Correct.
Mat Zalk 34:57
I’ve heard a lot recently about reverse mortgages okay. And it’s been great for me to understand, to dispel some of the old negative myths about reverse mortgages. Maybe they weren’t even myths. Maybe they were just changes that HUD made. I mean, as you’ve kind of elucidated, they weren’t there were things that were wrong and those things have been fixed. Have you seen a significant uptick in the number of reverse mortgages? I guess you see kind of industry trends. You see what you see, but then you are tracking other things in the industry that the number of mortgages that are, that are happening is. Has there been an uptick in your estimation of the number of reverse mortgages that are happening? Do you see the the gray wave, the silver wave, whatever it’s called coming through and more people taking advantage of this product when it’s appropriate.
Laura Phillips 35:39
I can’t sing the silver wave that everybody predicts is out there. Let’s put it that way. I would say that the average rates are up. So just like any other mortgage, when rates are higher, there’s less demand when the rates were at three and a half. I mean, there are some people out there with, with reverse mortgages that are like four and 5% interest rate and won’t tap out at like 7 or 8. So you know they have caps. I’m not seeing that demand like I saw when that happened. When the rates went up, it was really low. Demand we had in our industry was when we went from 75% to 65%. You couldn’t keep up with the phone calls because people wanted to get that 75%. Yeah. They didn’t want to take.
Mat Zalk 36:26
What was the lead time between Doctor Ben Carson?
Laura Phillips 36:30
Three months, three months, three months. It was really short. Yeah. Yeah.
Mat Zalk 36:35
Wow. Interesting. Yeah. How did you get into this industry?
Laura Phillips 36:39
I have been in this mortgage industry. My. It feels like my entire life at this point. It’s a long time. I’ve been in the mortgage industry for over 30 years. And I started out in the back end doing doing post-closing so the file could be sold to the secondary market. That’s how the banks make their money or the lenders make their money for the next year. From there I went to processing. So then I learned how to process a file. I got moved on to being a closer, so I understood how to be a closer and went from there to being an originator. So I originated first. I actually did affordable housing first and then did regular origination. And then about 7 or 8 years ago, I realized that I can talk to seniors better than I sometimes can talk to my millennial daughter. So and they can relate better to me. So it worked. It was a good fit. I and where I am licensed, I can do loans of all types, but I really focus on the reverse because I feel like it’s an underserved market.
Mat Zalk 37:38
Yeah, you’ve seen a lot of changes in Respa, and.
Laura Phillips 37:43
I see a lot of changes over. And interest rate.
Mat Zalk 37:45
Consumer Protection.
Laura Phillips 37:46
Yeah, yeah. Consumer protection. When I first got started, interest rates were at 18%.
Mat Zalk 37:51
Wow. Okay. So let’s talk about that for a second. People say that people people that have been buying real estate for a long time, say rates. They’re at 9%, 8% now on commercial terms, like when I started, they were 18%, but the world looked a lot different then, like the value of the house was, was, was also much lower, was it? But my question is, and I’ve not done this research and I should look into this, was the value of the house commensurately lower than given the interest rates, or was money just more valuable and therefore, you know, was it pre-inflationary. And I don’t mean 12% inflation that we had or whatever it is. Was it just 3%, you know, pre-inflationary 40 years ago. This is Reagan, right? I mean, Reagan was the one that cut the rates, right? If I’m right. So in the early 80s, was it just that a house was $100,000 and that same house, if you just track 3% inflation on a compound annual growth rate, would be worth $300,000 today. That’s my big question and I’m sure the data is out there. I just need to look at it. But could they afford, in other words, to state my question, could they afford the mortgage because the house value was inordinately cheap, or was there just no way to no other way to do it? So they did it and it was a little bit more painful. And now they’re looking back with, you know, rose colored glasses and saying, you know, when I was a kid, I walked both ways. I walked to school both both ways, uphill.
Laura Phillips 39:20
Uphill and downhill in a snowstorm. Right.
Mat Zalk 39:22
That’s that’s my that’s my question. Do you have any sense. Do you have any sense? I mean, of.
Laura Phillips 39:26
I think it was harder to sell homes back then. It was harder to do the real estate. We did a lot of wraps, which of course are illegal now. But back then there were more suitable loans. Even conventionals were more assumable back in those days. So you would wrap it and, you know, and sometimes be wrapped three layers deep.
Mat Zalk 39:45
Wait. Meaning? Meaning I had a house at a 3% rate, or in those days it would have been 15, would have been cheap vis a vis the going. So mine was at 15. You bought my loan? You assumed my loan, right? And then you did a rap of a mortgage around it. So you did a second, second position, right? Wow. So sometimes.
Laura Phillips 40:03
I see three layers deep. I’ve seen that where it was sold twice. So there were two sailors, two sellers and one loan holder.
Mat Zalk 40:11
Rap became illegal on a from a from a Freddie Fannie perspective. Or is it illegal? Like there are some banks still I presume that’ll do a I mean now it’s called the HELOC. I guess you could. Well, I don’t know. They wouldn’t know.
Laura Phillips 40:24
Because there’s only truly Assumable loan is a VA loan, and the vets vet has to agree to allow you to assume his entitlement. And that takes away from their entitlement or his or her entitlement at that point. So yeah.
Mat Zalk 40:40
So I guess if you if the loan, if you assume the loan, it’s not in your name, there’s not going to be. And that means that the title is probably in a trust somewhere.
Laura Phillips 40:50
If you do, title can be moved over to you. But the person let’s just use the only truly assumable loan right now is the VA loan. So the vet would allow you to assume their loan, but they’re not off the hook for that mortgage. So they’re going to.
Mat Zalk 41:04
They’re still recourse back to them.
Laura Phillips 41:06
There’s recourse back to them if it doesn’t get paid. So that is where and is it.
Mat Zalk 41:11
She’ll still show up on their DTI. Yep.
Laura Phillips 41:14
And credit.
Mat Zalk 41:15
And you would still. But in that scenario I can’t imagine any seller, any vet seller actually transferring the deed. I think they would put it into a trust.
Laura Phillips 41:24
We don’t see assumable loans. Yeah, right. It doesn’t make sense. It’s the only time it would maybe make sense is if vets exchanged entitlements back and forth. You know what? They both have entitlement. They just kind of trade their entitlements and can move forward.
Mat Zalk 41:38
You mean a vet buys a vets house, right?
Laura Phillips 41:41
Right. And you could just exchange entitlements because because it also hurts them with how much entitlement they can have for guarantee for the next house. So you bet.
Mat Zalk 41:51
Interesting. So they just normally would sell it and then they still have access to that entitlement.
Laura Phillips 41:56
They sell it. They have their full entitlement back.
Mat Zalk 42:02
Wow. So I mean. That’s a fascinating world.
Laura Phillips 42:04
Oh it was. I mean, you know, and so much of that is water under the bridge. I mean, it’s like it’s like you can sit around and like the good old days. If we thought they were good old days, we could talk about what things we did that we can’t do now. And those are the things, many of the things that we can’t do now.
Mat Zalk 42:19
Like sell and mortgage and an annuity. Those were the. No. I’m joking.
Laura Phillips 42:24
Those are not the good old days, right? Well, this is it. Because the reason they don’t HUD doesn’t want you to look at annuities or wants you to discourage you from it, is that they can give you a ten year payment. So we’ve talked about getting a line of credit, but what if you don’t need the line of credit. You just need more income coming in. You didn’t put enough away. So you can just it can be a ten year payment just like Social Security is, and you can set it up to be a ten year payment for the rest of your life, you know, or the time period of having the loan. So that’s why they felt like selling an annuity was maybe not in the seniors interest, because it could already be that it could be an annuity and give you a ten year payment, just like an annuity can. And I don’t sell annuities. So that’s about the extent of my knowledge of those. But yeah.
Mat Zalk 43:12
I love it. Laura Phillips is a licensed reverse mortgage specialist with a mission to guide people through the entire reverse loan process so they feel confident about the options available for their next 30 year financial strategy. From helping real estate professionals, customers and financial advisors navigate home financing to finding mortgage solutions that work for them, she’s helped thousands of customers find the right mortgage solutions, and that’s been over a storied career, if I do say so myself. Laura’s 25 plus years of experience in real estate lending have taught her that it’s not just a person’s house, it’s their home, and it’s one of the most significant financial commitments a person will make in their life. She helps people devise strategies to enjoy their best years in their family homes. And we heard about that with the person that you said, I don’t know if this is the best solution for you this time around, right? Laura, how do people find you if they’re interested in potentially taking a reverse mortgage on a primary residence and then reinvesting it back into some rental property?
Laura Phillips 44:11
Absolutely. They can reach out to me at [email protected]. That’s an email address. Or they can look at my website. lauraphillips.com.
Mat Zalk 44:21
Love that. Laura it’s been great to chat with you. You’re a fountain of knowledge and I love how much experience you have in the industry.
Laura Phillips 44:28
Thank you man I appreciate you had great questions. Take care. You too. Bye bye.
Outro 44:36
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