575: Should You Pay Off Your Home?

0:00You are listening to the Well Formula Podcast with Bud Jaffrey. Get ready to change your life. Welcome everybody. This is Bud Jaffrey with the Well Formula Podcast. Today I want to talk to you a little bit about a question that I get all the time and that is, should you pay off your home? You could pay your mortgage off. And that's a question I get a lot from investors, but the answer isn't that simple. The math might suggest otherwise. I mean, for years, the calculation was pretty easy, right? When mortgage rates were extremely low, borrowing money was cheap. You know, the returns you could reasonably expect from investing that capital elsewhere were pretty obvious. Now, if you were getting a mortgage today, you might be getting a mortgage with a rate above 6%, which is kind of ugly, but you can still make a mathematical argument for keeping a mortgage and investing your money instead. Particularly if you believe your investments are going to compound at a higher rate over

1:02the long term, which, you know, they're still probably you're going to be able to do that, even if you're just, you know, investing relatively conservatively. But let's take the math out for a moment. And there's a powerful psychological argument for owning your home free and clear. And I get it. No mortgage payment, no worrying about whether your investment income will cover the house. If your cash flow suddenly drops, whatever happens in the market, the economy, you know you have a roof over your head. And for some people, that peace of mind is worth more than squeezing out a few additional percentage points for return. Now the obvious side there is that you may have hundreds of thousands or even millions of dollars of equity trapped inside your home. What if there was kind of a middle ground? Well, in my recent conversation with the reverse mortgage expert, I learned some things about these products that genuinely kind of surprised me. For example, I had no idea, but did you know that with certain reverse mortgages, depending

2:06on, you know, how big they are and all that kind of thing, you can establish a line of credit and not use it at all. And potentially make 6% of interest on your money in your house and your equity, depending on whatever the rates and prevailing rates of the terms of the loan are, you know, I, again, no idea. And so that's a thing is that some of these things create interesting possibilities, owning your home without a traditional monthly mortgage payment while still maintaining access to some of the equity, getting some return on that equity. Anyway, listen, reverse mortgage has been around for years. I didn't know that much about them. You just, you know, you hear about them. They don't have a particularly good reputation, but it's always important to understand these tools because you never know when you can use them. So this week on Well Formula of Podcast, I said down with a reverse mortgage expert and we try to separate some of the fact from fiction, what's real now versus what was maybe the case of, you know, a decade or two ago.

3:09And to see if this financial tool might make sense for some of you. Anyway, interesting interview. Again, these are the types of things you ought to know about when you are dealing with your own personal finance situation. We'll have that interview for you right after these messages. Hey, everyone. If you haven't done so, make sure you sign up for investor club. Investor club is Well Formula's private investment community. All you need to do is to go to Well Formula dot com and sign up for free. And if you are an accredited investor, you'll get an opportunity to quickly do some paperwork and meet one on one with me and get onboarded. And once you do that, you get access to all sorts of potential private deal flow that you can only see if you're part of the club. So join now, join investor club at Well Formula dot com. Well Formula bankings and ingenious concept powered by whole life insurance. But instead of acting just as a safety net, the strategy supercharges your investments. First, you create a personal financial reservoir that grows at a compounding interest rate,

4:14much higher than any bank savings account. As your money accumulates, you borrow from your own bank to invest in other cash flowing investments. Here's the key. Even though you borrowed money at a simple interest rate, your insurance company keeps paying you compound interest on that money, even though you borrowed it. At result, you make money in two places at the same time. That's why your investments get supercharged. This isn't a new technique. It's a refined strategy used by some of the wealthiest families in history, and it uses century old, rock solid insurance companies as its backbone. Turbocharged your investments. Visit WellFormulaBanking.com. Again, that's WellFormulaBanking.com. Welcome back everyone. Today, my guest on Well Formula podcast is Kevin Goetman. He's a reverse mortgage specialist and senior mortgage broker. With more than 20 years of experience in home financing, and he focuses on helping older homeowners, maybe not just the older ones.

5:15We'll talk about that. Use home equity to improve retirement cash flow and financial flexibility. He's the author of several books on retirement finance, including the Swiss Army Knife of Retirement Cash Flow. Kevin, welcome to the program. Thank you, Bob. I'm glad to be here. Kevin, let's start with the basics. What we're talking about here is the concept of the reverse mortgage. Tell us a little bit about it. Funimally, how is it different from a traditional mortgage or home equity line of credit? Yeah, good question. With the traditional mortgage, when somebody signs the loan paperwork, they're personally liable to pay that loan back. With a reverse mortgage, it is a non-recourse loan. What that means is the only recourse a lender has is the sale or refinance of the property. The person borrowing the money isn't personally liable to pay it back. That's one unique feature about a reverse mortgage. Another one is with a traditional mortgage payment is mandatory, with a reverse mortgage of payments optional.

6:16Another one is with a traditional mortgage, you pay down the mortgage each month, with a reverse mortgage, if you access the equity and if you have a loan balance, that loan balance is going to grow month or a month. One of the reasons people get one in 55 and older is they want financial flexibility. Maybe they want to start giving their estate away while they're alive, help their children or grandchildren purchase their first home, buy another business. I'm helping a guy right now in Washington state. He wants to buy a vacation home. What happens is you've got all this money locked up in a home and then we're with three ways to get to it. Sell your house, do a cash out refinance or a homeic reliant a credit or get a reverse mortgage with a thousand optional payment. If you already have a mortgage, you can't really do this or can you or is it dependent on the amount of equity you have? Yeah. Depends upon how much equity you need or you have.

7:19For 55, somebody 55, you need probably about 65% loan to value, 65% equity, 35% loan to value. The older you get, the less equity you need, but it's really kind of like a fingerprint. Fingerprints are very unique. You're a physician, you understand. All the human bodies made more than me. The idea is people use it in all kinds of ways to just accomplish the things they want to accomplish. They're like, maybe they need a tax free source of income or it's not income because it's not taxed. But a tax free source of cash, they can access. You can access the money three ways, lump sum, monthly payments, line of credit or a combination of any of those things. I think what people love about it is the flexibility. Right. It's essentially you are taking loan to like, how are the interest rates?

8:22Typically, these compared to like a healock or a regular mortgage. They're very similar to healock rates. High eights, low nines, which is what healock rates are right now. The difference is with the reverse mortgage determined the loan is 150 years, healock is a 10 year draw and a 10 year repayment. A healock has a mandatory payment. Reverse mortgage has an optional payment. A healock charges interest, a reverse mortgage also charges interest. But there's also a line of credit feature where if you have money in a line of credit that can grow by compound interest month over month, which is different than a healock. Explain that. Explain that. I'm a little confused on that because you've effectively, in my mind, what you've done is you've created a line of credit through effectively the reverse mortgage is kind of a line of credit, isn't it? It can be. Yeah. How are you actually making money on that?

9:22Yeah. If somebody takes all the money available to them upfront, there's no line of credit. But if they let it stay in the account, there is a line of credit that can grow by compound interest month over month. And it's protector from the market. And when they draw the money out, it grows tax-free. When they draw the money out, it's not taxed because it's not income. Loans aren't taxable. Sure. The difference is with a healock, it can be canceled, frozen or the full payment demanded. With a reverse mortgage, none of those things can ever happen. So it's actually more secure than a healock and more flexible than a healock. Yeah, understood. So when you talk about that line, again, this is really important. I just think because you mentioned, if you don't draw on it, you can get interest on it. Is it the full amount that you would typically get interest on it? Because I guess one of the things that might sound appealing to people is, hey, maybe I just get a reverse mortgage and I have it there just in case, but if they're going to pay me interest on it, then that's better than just debt equity.

10:25Exactly. So let's just take an example. Let's say for round numbers, we have a million dollar home. Somebody is 55. So they're going to borrow approximately 35% or 350,000, but they don't really need the money. They're still working. They still have money coming in, but they want this line of credit growing in their favor. So now that 350 is going to grow a month over a month, as long as they don't touch the money, it's just going to increase. But they're come a point where they do need that money. Either they want to start distributing it to their family or to charity or buy another home, second home or maybe buy a business or a vessel property. Whatever they want to do, now they've got that money available to them where, so I'm in Colorado. Here's a good example. I'm in Colorado. And I have people that go somewhere else for the winter. So they get a reverse mortgage, no payment on their existing home with a reverse mortgage. They pay cash for a second home. And then when they're not there, they rented out with short term rental income.

11:26So now they've created an income stream with a short term rental. They have a place to go on the winter time. And then they've got their reverse mortgage where there's no monthly payments. So it really just increases cash flow and helps people to have more options actually. Yeah. So, you know, reverse mortgage sort of had a bad negative reputation. You hear it's just got some bad connotations with the how much of that reputation is deserve bad players. Can you tell us about what it is that has given it sort of a black eye? Yeah, great question. So from 1961 to 1988, these loans were not regulated. So you had lots of players in the market offering reverse mortgages and never sent on scrupulous people or someone's scrupulous companies that would take advantage of seniors. IE, they'd forfeit their home, whether title to their home or go under foreclosure. In 1988, President Reagan and Congress passed a home equity conversion mortgage bill.

12:27Heck them. And what it was designed to do is allow a senior homeowner to remain in their home, age and place, gain access to their equity, have an optional monthly payment, and just allow them to not worry about running out of money. And over the years, the program has improved. This is the FHA back program I'm talking about right now. But what ended up happening is private companies came into the space and they said, well, we want to offer jumbo or proprietary reverse mortgages for homes of a million to five and up to 10 million. And so now you've got about four companies in the country that do this. And they're all very competitive, all very similar. But the idea being you've got a class of people that have high value homes with a bunch of equity sitting there that your term debt equity, they can't get it. So now we're unlocking the portion of that equity that people can tap into and do what they

13:30want with it. Right. Right. Let's go through a concrete example here again, just so that people really understand this. So you're 62, $2 million paid off. And I say, well, debt equity. So what you're saying is I can just say, well, first of all, how much equity can I draw from that $2 million? Is it the full amount? Probably about 35%. Okay. So with a $2 million home free and clear, they're probably going to get close to $700,000. Okay. So now I have a $700,000. I don't know, line of credit, whatever you want to call it. If I don't use it, what's the typical interest that I'm growing? On the Hecum. Yeah. It's about 6% a year. 6%, okay. So you're 6% on that $700 grand? Yes. Well, the Hecum will only loan up to a $1.25 million value. So then take 35% of that, which is... Right.

14:31Okay. Got it. So you see your capped in terms of the line of credit. With the jumbo, the line of credit growth is 1.5%. So it's less than the Hecum. But again, the equity is just sitting there doing nothing. Right. So somebody could get a He-lock and have a mandatory payment, or they could get a reverse mortgage and have no payment. Yeah. And you can't get 6% on the first $1.2 million of equity type thing or... Well, they're two different products. Yeah. They're two different products. Yeah. So you have to qualify for that. Okay. So you have to qualify for that $1.2 instead of nothing. And if it's less than 1.5, the 1.5, and if your house is worth less than or equal to 1.25 million, you can do this with 35%. Or you're getting 6%, which is actually pretty significant. Correct. Now, you turn around at some point, you want to borrow against that.

15:33You're talking about essentially at that point, you have a borrow against that. A borrowing component that maybe you're paying 8% or 9% on. What about the part that you are not borrowing? Is that continuing to grow at 6% if it's in the heck? Yeah. So this is the way to think about it, which helps people understand it. You are still earning the appreciation on the full amount. Oh, okay. On a $200,000 or a $2 million home, it's going to praise, we'll just say, a 5% a year for sake of math. Yeah. That is about $100,000 a year. Yeah. Okay. Then you've got the other side, which is the line of credit. Right. And $700,000, that's going to grow at 1.5% a year. You can pan it, draw it down. You can draw it, pay it down, draw it, pay it down. It's kind of like, if you're familiar with a life insurance example of being one banker,

16:33yeah. That's going to be with a mortgage. Yeah. It actually makes sense. So basically you're getting, so the eight or nine percent that you are borrowing at, some of that's offset by, you know, on the 6% or so in the heck, um, that you're making on money that you've not borrowed, right? Or is it on the full balance? Yeah. You only pay interest on the amount you draw. Right. Right. But the heck, um, you said, is that on the full balance or is that just on whatever's left? Right. Whatever you draw is what you pay interest on. Okay. So you ask for a real world example. So I have a client that was concerned about, um, leading, decreasing the amount of money they would leave their kids if they got a reverse mortgage. And so why don't you do this? Why don't you take out a life insurance policy? Uh-huh. And, um, let the equity of the home pay for it. Tie a living benefit writer to it so that if you ever need long-term care, by the way,

17:34long-term care usually starts at home. People think long-term care is when you go live somewhere else. Long-term care almost always starts at home. You bring somebody in to help you clean, bat, um, cook, run errands, use the bathroom, et cetera. There's all these things people need help with as they age. But it starts at home. So you pay somebody to come in to help you with those things. And so if you don't have a long-term care policy, you need a life insurance policy. And so if you're a living benefit writer to it, now you shift to the responsibility away from yourself, your, your state, or your ears, helping to take care of you. Now you can pay through your insurance policy to have somebody care for you and the equity from the home pays for that. And at the end, there's actually more equity or more money that goes to the children through the proceeds from a life insurance policy. Right. Or, or, I mean, could that life insurance policy also just pay off the, uh, reverse mortgage and then they keep the house?

18:34Absolutely. Yeah. So effectively, you could, I mean, I, that, uh, the concept works really well with, we got a well-formal banking, sort of, uh, this, this concept that you just mentioned. Um, so interesting. So again, you're, you're borrowing essentially equity to create, uh, insurance policy. Uh, and then, you know, enjoying all the benefits of that. And then at the end, when you die, you, you've essentially paid off your, uh, reverse mortgage or if the kids want to just sell the house or whatever they can do that and keep, keep the, uh, death benefit. Yeah. So let's touch on those two things. Um, how does somebody qualify? One they have to be old enough. They have to have the right property type, single family, home, town, home, etc. How old do they need to be? You said 55 or 55 for a jumbo, 62 for a heck of a, okay. Both borrowers need to be 55 for the jumbo. One bar needs to be 62 for the heck of a, it needs to be their primary home.

19:34They need to maintain it, pay the property taxes, insurance, if there's an HOA fee, pay that on time. As long as they do that, they cannot live it. The term alone is 150 years. What happens at the end? Because however you need to know, okay, I don't live there anymore. Now what happens? The errors have up to six months to sell or refinance the home. If they need more time, they can get two, three months extensions. So in effect, they have a year to settle the house, pay off the debt, either by sale or refinance of the home. Got it. Is there a scenario in which somebody who has one of these puts himself in danger of just getting, you know, foreclosed on and kicked out of the house? Good question. The only way somebody can get kicked out or foreclosed on is if one, this doesn't remain their primary home. Two, they're not current with their property taxes, homeowners insurance, HOA dues, and three, they don't maintain it. Well, most homeowners maintain their house. Most people pay their taxes insurance on time.

20:37And unless they're committing fraud, which I haven't ever had anybody do, trying to scam the system where they don't actually live there, that's the only way they can be kicked out or foreclosed on. Right. So let's talk just in general, expensive this thing is outside of the usual insurance, I mean, origination fees, mortgage insurance, closing costs, and interest. How expensive are these compared to the other mortgages and homeowner, like credit? Yeah. So it's very similar to a traditional mortgage as far as the fees, title insurance, appraisal, credit, origination, etc. The difference, I'll compare the heck with the proprietary. All FHA backed mortgages have mortgage insurance. So if you have a million dollar home and you got a heck of them, that's $20,000 you're paying in the upfront mortgage insurance. It's paid one time, it's rolled into the loan, but the proprietary doesn't have that. How do they make up for that? So I mentioned that the interest rates on a heck of them are in the mid to high fives.

21:42With their worst jumbo, they're in the high eights low nines. So that's how that spread is how these proprietary jumbo reverse lenders make up the difference. They don't charge mortgage insurance, but they charge your higher interest rate. The fees are less on a jumbo or proprietary than they are on a heck of them. What's the most creative way you've seen this used? Have a lady in Grand Junction, Colorado, Grandma, and I asked her why she wanted to get a reverse mortgage. And she said I was a single mom growing up, raising my kids. And now my daughter is a single mom. I have three grandsons. And I want to create memorable vacations for them so that when I'm no longer here, they can remember all these places I took them on vacation. I have another missionary family. Actually, they were missionaries in Europe for years. I go to their home and their first thing out of their mouth is we don't have a lot of money. Well, we freed up their monthly mortgage payment. So they had more breather room every month.

22:43Then they wanted to take money out of their reverse mortgage, help their daughter by her first home. Because as you probably know, people who are homeowners have a 40 times higher net worth than renters. So now they're helping their daughter build wealth at real estate. I've had a client who got sick, could no longer work. They almost had their house paid off, but they needed more money to replace his income. So we paid off the mortgage, freed up that money. They're getting 1200 of the month from the equity to live on each month because you can get the money three ways, lump sum monthly payments, line of credit, they chose monthly payments. So now tax wise, if you take the money, they were, they're getting and you grossed it up. In other words, he had to earn this amount to get this amount. He basically replaced the income he was earning. I'm another lady. Actually, the very first lady I helped, she was a daughter, a mother of a client.

23:45And she's 84 years old. Her name's Carmen, five foot nothing, just full of fire. And I asked her, I said, hey, Carmen, why do you want to do this? She said, well, to be honest, my budget's tight. I said, okay, I understand that. You're on a fixed income. A lot of people in that situation, tell me more about that. She says, well, when I go to the grocery store, I have to use credit cards to buy groceries. So at the clothing table, I'm doing the math, you know, no more mortgage payment, freeing up the credit card payments. It's about $1,200 a month to the good in her budget. And I asked her, I said, hey, Carmen, I know the math, but how is this going to help you? She kisses me on the cheek. I had to go home and tell my wife we got the closing table by 84 year old client. And she says, now I don't have to worry about money. I can sleep at night. Another way, buck, that people don't realize is somebody can finance a home with a reverse mortgage. So let's say somebody's lived in their home for 20, 30 years, raised their family, but

24:45the neighborhoods changed. Maybe they wanted to have closer to their kids, or maybe they can't do the stairs anymore. They don't want to move along or make a home. So they have to move. So somebody can finance a home with a reverse mortgage, just like a VA loan or a conventional loan or whatever. So now they put up 65%. We'll just say the loan puts up 35%. Now they can live in a home that better suits them in a stage of life, lower maintenance, maybe safer, closer to the family, less maintenance, no deferred maintenance, etc., etc., newer updated amenities. So it's just a great tool that's very misunderstood. You have people like Dave Ramsey and Susie Armon out there who aren't licensed and aren't up to date. But what's happening? The laws change significantly in 2014 and 2015, but when you hear them talk, they're out of date. They're talking about things that were prior to 2014 and 2015. You go online and you look up reverse mortgage. There's no date stamp on the website, but all the negative stuff is prior to 2014 and

25:492015 because the government specifically, FHA, realized there was flaws in the program when they corrected them. And now the foreclosure rates down, occupancy rates higher, the fraud rates down, it's just so much better for people. It's the safest mortgage that anybody can get in the country. Yeah. If someone is considering one of these, what should they compare before signing anything? Like the questions they should ask or the economics that they should be looking at as they're being potentially sold to product. Yeah. I always tell people there's really four questions you need to answer. One is this the right time. The right time meaning you qualify. You're old enough, you have enough equity, you have the right property tied, you have enough income to prove you can pay the property tax insurance maintenance on the house. Most people qualify with just their social security actually. Is your credit acceptable? We don't look at credit score. We look at credit history. If they've been current the last two years, then is this the right product?

26:51And here's what we dig in and just try to help people say, okay, what are some options you have? You know, you could sell your home. You could rent. You can go live with your kids. You could take in a border. And usually what ends up happening is they say, I don't want to live with my kids. I don't want to take in a border. I don't want to go back to work. I want to access the equity now so I can start giving it away or I need another income stream or I don't want that equity. Successful people are successful for a reason, right? They're smart. They don't like the fact that their equity is sending their earnings 0% when they've got an IRA or a 401k or investment accounts earning whatever they're earning. It's not zero. So at least they want to get something from their equity. So velocity of money, they want that money working for. Yeah. When I think the thing that I think is potentially the most compelling thing that I've heard you talk about here is just somebody with equity in their home and in particularly with

27:52those who qualify for the heck, just being able to essentially take out, you know, like you said, 35% and not even borrow from it, but just earn 6%. And that's why wouldn't you do that, right? I mean, if you're not. Yeah, it's insured. It's tax-free. It's protected from the market. It's actually a financial tool. It's the best financial tool and the most misunderstood financial tool. Interesting. So the other two questions I tell people to ask is, is this the right time? Is this the right product? Third, we're the right company. I work for a company called C2 Financial, we're a large broker at San Diego, we're the largest borrower's borrower's broker in the country. We have 13 of the 16 lenders who offer these products in the country. We have all the proprietary lenders who offer it. It's better the work with the broker because they have all the products and they can shop for you. You're done. And then the fourth thing is am I the right guy? And if I could put a plug-in for a certified reverse mortgage professionals, there's only 210 of us in the country and we have to pass a rigorous exam, abide by a code of ethics,

28:55commit to continue education and have enough experience to even sit for the test. So we know this product inside and out and it's worth it for somebody to sit down and learn about it and work with a broker and a CRMP in my opinion. Great Kevin, let us know where people can get in touch with you if they're interested. So I have two websites for the jumbo, I have luxury reversemorkers.com. They want to read about the jumbo proprietary. And for the heck of them, I have reversemorkersrevolution.com. On that site, there's a guide, somebody can download and read about it. I've got videos, FAQs, articles, blogs, etc. And then my phone number is on there if people want to reach out and there's even a calculator on there, they can run the numbers and see how much they can get. So if somebody wants to explore me for actually talking to me, that's the best way to do it. Those two sites, but people can always call to him, happy to visit with people on the phone, 877-2519709.

29:57Thanks so much for being on the show today. I really enjoyed it, thank you Buck. We'll be right back. What if you could invest in the market, participate in the up years, but sit out the down years? And then what if you could strategically amplify those gains using institutional grade leverage? It's not too good to be true, right? But it's not. This is a structure that's been used by some of the oldest, most conservative insurance companies in the country and quietly used behind net worth families for decades. I call it wealth accelerator. So if you feel behind on retirement, you're simply looking for a smarter way to grow capital without taking full market risk, go to WellFumilbanking.com and watch a webinar where I walk you through the wealth accelerator and how you can mitigate risk and optimize your future with income that lasts a lifetime. Again, go to WellFumilbanking.com and don't wait because in this case, time is money. Welcome back to the show, everyone. I got to admit, I was kind of surprised by this because I actually didn't think that

30:59there was probably the reverse market is worth something to seriously look into for most people. But listen, hey, if you're in your 60s and you know, you can potentially even just do this and make a little bit of money on the equity in your house. I mean, maybe it's worth looking into. I don't know. Anyway, all of this is just to give you more ammunition in your financial knowledge base. And that's all we do here at WellFumila. And that's it for me this week on WellFumilb podcast. This is Buck Jaffrey, signing off. Thank you for listening to the WellFumila podcast. Visit us on the web at WellFumila.com. The information contained in this podcast are opinions, not fact. As always, consult your own financial team before making any investment. See you next time.