Hello! In this post, we're going to talk about reverse mortgages. How they work, and whether they are the best option vs. other types of refinancing or downsizing. I think the conclusions may surprise you. We also review in some detail the financial structure of a reverse mortgage, as it is a unique financial product, and has some unique costs that most buyers are not aware of. Enjoy!
Transcription follows
I'm sort of assuming that if you're thinking about a reverse mortgage, you understand the basics. And then I'm really going to talk about what your other options might be the kinds of other things that you might want to consider. Uh, specifically downsizing to kind of see whether or not these things all sort of make sense. I know for a lot of folks that are trying to solve this problem, they have a lot of different opinions from people that they might ask. And of course, you know, if you ask a loan officer, he's going to say, well, the reverse mortgage is the best thing you can do. And if you ask a real estate agent, they might say, well, downsizing is the best thing that you can do.
I'm going to try and present both of those things as potential options that you can kind of see the trade-offs, which I hope will be useful for everyone. The simplest way I can explain a reverse mortgage is that it's a way to use the equity in your home. And basically, you borrow against the equity in your home and you do that until the home is sold at which point in time that debt is paid off. Unlike a traditional mortgage where you make payments and you pay down the loan balance, A reverse mortgage, you actually can take money out. Literally take money out of the house, and then pay it back later. Now, that's a really neat trick, and it doesn't happen for free.
And so, part of this video is going to be talking about the costs that are associated with it and hopefully what I hope it's a simple way. So, For reverse mortgages, They may make sense for you If you have hundreds of thousands of dollars in equity in your home, they don't tend to work very well over small numbers and someone generally needs to be 62 years or older. There are exceptions. There are a lot of products out there. But the standard product, if you will is an HECM, A home equity conversion mortgage, and that product requires you to be 62 years old. For any Reverse mortgage, You’ll definitely want to make sure that you read and understand the fine print you'll get several opportunities to do that. The loan officer will go over some stuff. There's other safeguards put in, we'll talk about those but just very basically, it's expensive financing and that doesn't necessarily mean that it's bad. But it is more expensive than other types of financing. you want to make sure that you're comparing all the different types of financing before you make a decision. um, and thinking about the math is what we're going to do here today.
If you're just joining us, my name is Matt Heisler. I have been selling real estate for 22 or 23 years or so, I'm not an attorney and I'm not a lender. I'm just a real estate agent but I have helped many people to downsize and I find that many of them are asking the same sorts of questions. And this is the sort of channel that I do is to talk about these kinds of issues and I try to do it in a neutral and non-judgmental way, we try to see where it goes.
Why might you do a reverse mortgage? Well, if you do have a lot of equity in your home, uh, and you'd like to access it to live on, you may find that it is difficult to access especially if you are retired or otherwise unemployed. And the reason is because a bank is going to look at your income and if they don't think your income is sufficient, then they're not going to let you do a traditional refinance or get a home equity loan. A reverse mortgage is a way to access that equity in your home, which you have earned, By the way, it is your Equity you've earned and you should have access to it! And a reverse mortgage will allow you to access it and to stay in the property that you are in for a much longer time than you might be able to otherwise. The good news is that although they're expensive, Some of those expenses may be offset with the appreciation that you continue to earn in your primary residence. Take a look at that, but before considering a reverse mortgage, I generally encourage people to make sure that they have ruled out the other options.
If you can do a regular refinance because you have enough assets, or that you have enough income, Generally, you should do that. That is cheaper. If you can do a home equity line, generally you should do that because it is cheaper. Now, one of the problems with doing it that way is you may not be able to access the full amount of equity in your home. Like you can't get 100% mortgage, right? Like if even if you refinance and you have the assets to do it, they probably will stop you somewhere around 80 /20 for a traditional refinance situation. For a home equity line, they may stop you at 75 of the total equity in the house. But of course, if you do not have any income and what you're talking about, a tremendous amount of money that needs to be paid back. Then, the bank may say no regular refinance, no home equity, you can't do either of those things that still leaves one option. One option is to downsize, and I do talk with a lot of people about downsizing. Oftentimes, there's usually one person who wants to downsize or one person is less excited about it, but it does have, uh, some significant options. if you have a larger house, usually a house larger than what I would say, is 2500 square feet And if you're trying to get into a smaller property, you can usually get the numbers to work. If you've lived in that house for a long time and you have plenty of equity and of course the larger your house is generally the better, those numbers work and another way to make them work is to go from the town that you're in to a less expensive town in Massachusetts, that usually means going north, south, or west of where you are but sometimes you can do it another way. And generally if those are the parameters that you're sort of working with and you'd like to know more about what your house is worth, and what you might have to pay in order to downsize, that's a good time to give me a call.
I'm happy to help you, uh, walk through those numbers or build a spreadsheet if you're inclined. And then we can talk about what the downsizing numbers might be. Sometimes I get called about downsizing and the numbers just don't work because there isn't enough equity in the home or the house isn't, you know, you're going from 1600 square feet to 1200 square feet. There's probably, that's probably not going to work as far as a downsizing option unless you're switching towns. Unless the second town is quite a bit cheaper. Now, when we look at the kinds of costs that you typically have to pay for any kind of financing for a house, we'll start with your basic refinancing option. That's usually around $4,000. This doesn't count closing a lot of the closing costs that come back to you, but just the cost to the bank to do the loan, it's usually $4,000 or less. Now a big difference is if you refinance, you're going to get a fixed rate most of the time or an arm that's good for five or seven or ten years, and a HELOC is going to float, it's going to have a floating rate most of the time, but there again, there are a lot of different products. But at the end of the day, that's a relatively inexpensive way to access a great deal of money and equity in your home. Those are good products to look at. And if you're thinking about retiring, but not retired yet. Um, this might be something that you want to look at because if you refinance you don't they they don't ask for the money back., just because you, you have retired. But if you've already retired and uh, the bank is not enthused about Either of those options for you, then you want to look at downsizing probably and downsizing is a good option if you plan to move. What a lot of folks the way they try to work the numbers is they try to take the equity in their home and pay cash, use all that Equity to pay cash for the next house that they're going to and that could be a great that can be a great financial move because now you no longer have a mortgage, however, you're not as levered to the housing market. Tthe appreciation that you get for your house is a little bit less, but it gives people a lot of security knowing that they do not have a mortgage, they're only going to be responsible for taxes and maybe HOA fees and maintenance. And while that's not nothing, It's, you know, better than having a mortgage to pay. Downsizing is definitely an option. A lot of people in this situation, we're looking to get the equity out of there. Then downsizing is a great way to do it.
The reverse mortgages that especially HECMs those home equity conversion mortgages, they unfortunately have very high fees. Okay, I'll call them closing costs, it tends to be 20 or $40,000 in order to open a home equity conversion, mortgage, uh, and then on top of that, you have to spend pay a special kind of PMI, which is around 2% of the entire loan balance that you have to pay that every year. So, on top of that, the loan rate that you're going to get is going to be higher than what traditional financing is. So, there are really three different ways that a reverse mortgage, is more expensive than the other kinds of financing. And I actually think that those costs are set up that way, because they know, the people who are downsizing are thinking about moving in commissions and all those things and when you add them all up, those things are between 20 and forty thousand dollars too, usually. the cost for reverse mortgage and the cost of downsizing or about the same. The tricky part to remember, is, if you get a reverse mortgage, you may still want to downsize later in which case, you'll basically be paying those costs twice. That's a hard thing to sort of figure out, but if you really want to stay in your home and it's worth the double payment there, in order to stay, having a reverse mortgage is really the right solution for you. Let's see what else here. Safeguards because of the higher cost. and the fees that are associated with the reverse mortgage, uh, in Massachusetts and I think across the country, probably a loan officer is going to refer you to someone who does not work for the bank or the loan officer to make sure that all the expenses and the benefits of a reverse mortgage are covered. That they've been explained to you and that is a good thing. I mean, ultimately, I think for a lot of folks from their main financial decisions they want unfiltered advice, they want the real information, that you make the best decision for themselves, this is clearly an effort to make sure that people who get into this product understand it. Does it, does it work for everyone? I don't know. You know, I I think the calls are helpful. especially when they're done, right? I hope it works for you, but at least they're probably right at least. They're trying to make sure that you understand what is a more complex Financial product. Most people will only get one reverse mortgage in their whole lives. Okay, it's the only time you're gonna do it. It's definitely good to get as many people weighing in on what it is and how it works as possible.
But the $64,000 question is, should you do a reverse mortgage? And as I'm sort of hinted to in this video, I definitely want to make sure that you've eliminated all the other options because on a cost basis, they are a lot cheaper, right? Lower interest rate, a lower entry cost. If you can do some other type of refinancing to access that Equity, it is a good thing to do, right? And if you downsized, basically the feedback that I've gotten from folks, is that it, they generally do it because it, they feel safer, right? Paying off that mortgage is a huge weight off their mind. That is, usually the driving force for people who are downsizing is to try and get rid of as much of that mortgage as possible or eliminate it all together, which is a great thing to do as I mentioned. It certainly should be an option that most people consider but If you want to really stay in the home and you can't use any of the other financing probably can't be a reverse mortgage for that, that is really like the best solution for it. But I do remind people that just because you now have access to all that Equity, you still want to be pretty budget sensitive about it. You don't want to be running up that balance very quickly. Because once it's gone, it's gone and unfortunately because you are paying interest on whatever you pull out of your house as that balance grows so does the interest payment it can really, the clock can really start to run on it and uh, and it means that you'll run out of equity sooner. That you might otherwise and that you don't want to be in that situation, right? Like so, you know, you do still need to have a budget, you do still want to be careful to make sure that that Equity that you've worked hard to put together. Um doesn't run away in a short period of time.
Okay, if you still have questions, I am certainly happy to help with any downsizing math that you might want to do how much your house might be worth, or how much it might cost to go somewhere else. And what that might look like and how old it might be and how nice and what kind of work you might need to do at your place in order to figure out the price that you want for it in today's market. I'm happy to help with all of that and if you look at those numbers and they don't work for you and you're not ready to downsize them, I'd be happy to refer you to someone who does reverse mortgages. There are lots of people who do them and or if you can still do the regular mortgage. I can refer you to someone that way also. And I think my goal here is really to make sure that you're getting the best advice for you. I don't think two people, Who are in similar situations would necessarily always make the same decision. And I think that's what's really interesting about a reverse mortgage or the downsizing choice, is that the, you know, similar people would make different decisions, based on how much risk that they want to do and the kind of way that they want to structure their finances, and I think both Solutions are good, hopefully, you agree. And I hope this video was helpful. Don't forget to subscribe. We'll probably talk more about these kinds of situations later. Take care.
