Understanding a Reverse Mortgage

Transcript of Interview: “Understanding a Reverse Mortgage”

Mike Barnes:

I think a lot of us, when our parents start to get into needing independent living or memory care, financial situations are a big, big option.

Kim Barnes:

Well, or even if they’re wanting to stay in their own homes and be able to provide the care there. Yeah, it can be very confusing and it’s really hard to figure out what are the best financial options. So today, we want to introduce you to Scott Norman. He is the co-chair of the National Reverse Mortgage Lenders Association, kind of a mouthful, but also did the very first reverse mortgage in Texas 20-plus years ago. So, Scott, thanks so much for taking your time to be with us today.

Scott Norman:

Well, Kim and Mike, thank you very much for having me on.

Kim Barnes:

Let’s just start with what is a reverse mortgage because I think that in and of itself can create some confusion.

Scott Norman:

Definitely, that’s a great question because it does create some questions and some tension. A reverse mortgage, in its simplest form, is a type of home equity loan that is designed for homeowners who are age 62 and over, who are looking to access or maintain their current way of life, their current living structure, and maybe even they just want to be in a situation where they would like to age in place in their current house.

One thing that I would always bring up when people ask, “What’s a reverse mortgage?”—we could talk about that—but one thing that I would love to get out of the way right off the bat is that there is one misperception about reverse mortgages: that somehow or another the lender is going to take the house, that you’re really selling your house to the lender. And I think that if you really hear anything on this podcast, the home stays with your mom and dad. It stays with MeeMaw and PawPaw. The lender at no point is going to take the house or get the house. It’s really financed just like a traditional mortgage or a traditional home equity loan where the lender would have a lien on the property, but the borrowers access the home, they can access their own equity, they can stay there, they live there, and at no point is the lender going to then turn back around and access the house or take the house. I just bring that up because that’s one question that comes up time and time again.

Mike Barnes:

I think a lot of people are also probably scared that, “Oh, this is great. I can get a hundred thousand dollars out of my equity, but oh my gosh, now I have to pay a thousand dollars a month immediately. Mom and Dad can’t afford that, that’s going to be tough on them.” But that’s not the case either, is that correct?

Scott Norman:

That’s correct. So, a reverse mortgage, in a very simple way, is like a deferred payment home equity loan. One of the unique aspects of a reverse, hence the term “reverse,” is that the lender pays you, and they can pay you in a lump sum payment or they can pay you in monthly payments or even in a line of credit. What is really unique and really fits very well for people who want to age in their home, who may be on a fixed income, is that they don’t have to turn back around and make traditional monthly mortgage payments. The payments, if you will, are made when the home is eventually sold, be it 10 years or 20 years from now, whenever the surviving borrower either sells the home or, maybe sadly, passes away.

Kim Barnes:

So in the simplest terms, is it basically you have your equity and as you’re getting payments or you’re getting that lump sum, it’s just sort of taking away some of the equity so that when you go to sell it, then that equity is no longer there, there’s maybe a different margin of the sale price?

Scott Norman:

Great point. So, think about it this way—you really nailed it exactly right. As each month goes by, since you’re not making a monthly mortgage payment, your loan balance actually rises. Think about it this way: a lot of people who are on a fixed income or who are in retirement, or as Mike said, are certainly burdened by this idea that I’ve got to turn back around and make monthly payments, and that might be a problem. Instead of turning back around and making your traditional monthly payment out of your savings account, in essence, your equity is going to make its payment for you.

Mike Barnes:

Sort of like borrowing against your equity if you want, and that’s the biggest difference. In a home equity loan, a traditional one that you take out for construction or whatever it is that you might need some money for, you’re making a monthly payment. The big difference with the reverse mortgage is that you’re not.

Scott Norman:

That is correct. It really can be an outstanding tool for people who are looking to age in place, pay off an existing mortgage. We see that a lot. What they might do is instead of taking out a lump sum payment, they might say, “What I’d really like to do is if you could pay off my existing mortgage and I no longer have a traditional monthly mortgage payment.” And then maybe put some in a line of credit or maybe pull out a little bit for a new air conditioner in Texas or have a line of credit. You really can customize it, and I think that’s one thing that is really special and powerful about the reverse mortgage is that it’s customized. It doesn’t matter if you’re a 62-year-old couple or an 80-year-old single borrower, it really can be customized to what your needs are, not necessarily the needs of the lender or the loan officer. I think that really can be beneficial and that’s one of the reasons you’ve seen the popularity of reverse mortgages increase so much over the last five or six years.

Kim Barnes:

So who’s the perfect candidate for a reverse mortgage?

Scott Norman:

There are two groups that fit into what the ideal candidate has been. It is married homeowners who are in their early to mid-60s and a 75-year-old widowed female. But I think to go a little bit beyond that, it really goes back to somebody who has a house that has probably a great deal of equity in it and they’re looking for different ways to monetize that home equity because most of the time homeowners really don’t want to sell their home. Now in fairness, there may be an option that is just not going to be possible—you might need to sell your home, you might need to move in with your children. But for those that have an ability to because of health or finances or whatever the situation might be, if you can stay in your home and access your own home equity without being a burden to your family or friends, to some extent, we really start getting into the other aspect of a reverse mortgage, and that is the fact that we’re talking about somebody’s mom and dad, we’re talking about somebody’s grandparents, and so there’s a really emotional tie to that. You want to make sure that you don’t want to make a bad decision. Sometimes people put off the idea of what are we going to do with Mom and Dad, what are we going to do with MeeMaw and PawPaw, and so sometimes you delay the inevitable. I would always say the more people you can get together, if you can get everybody together over the holidays or over a weekend and talk about what’s our real situation, what’s our financial situation, what’s our debt situation, what’s our health situation—it’s been my experience that when you get everybody in the same room, a lot of the taboo goes away and you really can make a much more informed decision about what’s in Mom and Dad’s best interest.

Mike Barnes:

I think there’s probably also a fear that Mom and Dad are going to borrow this money and, oh my gosh, in a few years they’re going to be upside down and owe more than it’s worth. But is there a limit on how much you can take out equity-wise?

Scott Norman:

That’s a great question. One of the unique aspects of a reverse mortgage are its consumer protections. There are really two. One is this is an FHA-insured loan. The federal government insured the original reverse mortgages years later back in 1999, and three separate times after that, the Texas legislature actually put the rules and laws of reverse mortgages in the constitution. So a reverse mortgage loan in Texas has as many consumer protections in it as almost any mortgage loan in the entire country. One of them is the idea that the reverse mortgage is a non-recourse loan, which means that there is no liability outside of the home for the parents or even the heirs of the estate. That’s important. The other aspect that’s really important is should interest rates go up significantly, let’s say you live another 25 or 30 years, there would be an opportunity possibly that you could actually borrow more money than the house is worth. Except with a reverse mortgage, the non-recourse feature kicks in, so you could never owe more money than the house is worth. It’s a great consumer safeguard and it really protects people for what I would call a “what’s the worst-case scenario.” The worst-case scenario is you’re really protected not only by the federal government but by the Texas constitution.

Kim Barnes:

Interestingly, that leads to a great question. Are reverse mortgages mandated or controlled in different states differently?

Scott Norman:

They are a little bit. Most of the reverse mortgages, probably 95%, are all regulated by FHA. Some states do have specific overlays, Texas being one of them. Texas probably has the most stringent overlays, which we’re a fan of because we think that the more overlays, the more consumer protections that are in place, the better off it is for Mom and Dad. As long as you’re in a position where you can say let’s talk about what the facts are. The facts are that it is regulated by the FHA and it is governed by Article 16 of the Texas constitution.

Mike Barnes:

Everyone has a different situation, so this is hard to make a blanket statement. Can you come up with an example of someone you advised, “Oh no, a reverse mortgage is not for you”?

Scott Norman:

Great question. When people say, “Who is not a good candidate?” I would always say if you feel that you’re going to be in a position where you’re going to sell the house in the next year, maybe the next two years, a reverse mortgage may not be the best option. But as you said, everything is unique and customized. There might be a situation where we have a very unique health problem or a very unique finance problem, so the common sense rules might be thrown out because we have to look at where we are today. I can’t always worry about five or ten years from now; I need to get over this hump today. But that would be something. If we’re talking about my parents or somebody’s grandparents, I would always come back and say it’s a little bit like when you refinance your house. Would you refinance your house if you knew you were going to turn back around and sell it in the next year? You probably wouldn’t. You might, but you probably wouldn’t because you’ve got the burden of going in and doing that.

It depends on so many situations that are customizable. I want to be careful I don’t pigeonhole somebody and say, “Scott said when I was talking to Kim and Mike that it wasn’t really in my best interest.” But it’s certainly important to know that this is not a complete advertisement that everybody should get a reverse mortgage because I don’t believe a reverse mortgage is for everybody. I believe every extended family should look at the options associated with a reverse mortgage because I think there are a lot of people that don’t know about reverse mortgages. If they start studying them now, in the next two or three years when that might be a situation in your family, you’re much more prepared, you understand what it is versus what it is not, and it can be really beneficial for you.

I think that’s certainly something that’s interesting because we see this giant difference between the World War II generation versus the Vietnam War generation. You’ve got a lot of different personalities and people who love their home. One thing that’s unique about Texas is that in Texas, your house is your home, and that may be a cliché, but it really is true. It’s not exactly always like that in other parts of the country where it can be much more of an asset. But this is where your kids or your grandkids grew up, they played on the swing sets, it’s where you make your cookies and take them to them. There’s a really emotional bond to that.

So I think that’s something that always needs to be considered when you’re thinking about what am I going to do. Should I get a reverse mortgage? Should I get a home equity loan? Should I sell the property? What am I really trying to get accomplished? I always say if you sit down and look at what is the financial situation, what are we really trying to get accomplished? Are we trying to pay off an existing mortgage? We see that a ton. Are we trying to do some home improvements? Are we trying to pay off some credit card debt? Do we need some nursing care? It’s always a good idea to put pen to paper, and when you put pen to paper, it really helps make the decision much easier.

One litmus test, maybe going back to your question, Mike, of how I would know if a reverse mortgage is a good idea, one great litmus test that I like is for those that have an existing mortgage. If you could go to them and say, “If I could pay off your existing mortgage and you no longer would have a traditional monthly mortgage payment, would that make a difference in your life?” To me, that’s a yes or no question. It may not always be that way, but if you say, “Boy, that really would make a significant difference,” then a reverse mortgage should be something that you really consider. If you say, “No, not really, because I owe more money than that or I’m in a different financial situation,” that helps maybe make some decisions for you.

Kim Barnes:

So many factors. Also, it shows that it’s very important to find somebody that you can ask these questions of and help you figure out if it’s a good option for you.

Mike Barnes:

Great advice and great tips, Scott. Thank you so much for joining us today.

Scott Norman:

Kim, Mike, thank you very much for having me on.

Kim Barnes:

So many things to consider. I guess the biggest thing is find an expert, find somebody who can give you some good advice about this. Don’t just jump into it. Get some good information before you do anything.

Mike Barnes:

Right, make sure it is a good fit for your unique situation. If you have any other tips or any type of story that you want us to do an interview about, let us know. Parenting Aging Parents.

*This transcript is auto-generated. Please excuse any typos or mistakes.