Announcer: Welcome back, America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now, here is your host, Jason Parker.
Jason: Seattle, Tacoma, Olympia, Gig Harbor, all the good people right here in Kitsap County, welcome back to another round of Sound Retirement Radio. I am your host Jason Parker. As always, I sure appreciate you tuning in to this little program. It sure has been fun for the last 4 years to see the program grow, and blossom, and become one of the top … When you type in retirement in iTunes, Sound Retirement Radio is 1 of the top 4. Typically, 1 of the top 4 options available on iTunes as a podcast which is really great because I started this program to add value to our listeners lives right here in this wonderful community.
Now, it’s something that’s grown around the country. If you’re tuning in like our … One of my favorite listeners that just called in recently, Joe from Kentucky, I think he is from, called to say how much he appreciated the work we’re doing. Thank you for listening and tuning back in to another round. I’ve got an excellent guest on the program. As many of you know, I really believed that as you prepare for retirement, one of the most important things you need to be planning for is cash flow. How can you have enough income to really live comfortably?
We’ve got a guest that’s going to share some creative, unique ideas with you and hopefully really educate you about some of the tools that are available out there today. I’m going to go ahead and bring him on to the program. Today we have Tane Cabe who is a mortgage expert. He is the author of the book, Double Your Retirement Dollars. Tane Cabe, welcome to Sound Retirement Radio.
Tane: Thank you, Jason. It’s a privilege and a pleasure to be here.
Jason: Yeah, it’s great. It’s great to be here with you. Tane, we’ve been starting the program off for the last several months now, almost a year with a joke and so I’ve got one. I hope you’ll play along with me here this morning.
Tane: Yeah, absolutely. I’ll try.
Tane: Go ahead.
Jason: Knock, knock.
Tane: Who’s there?
Tane: Granny who?
Jason: Knock, knock.
Tane: Who’s there?
Tane: Granny who?
Jason: Knock, knock.
Tane: Who’s there?
Tane: How long do we have to keep doing this? Granny who?
Jason: Knock, knock.
Tane: Who’s there?
Tane: Aunt who?
Jason: Aren’t you glad I didn’t say granny?
Tane: Yeah, I’m really glad.
Jason: These jokes, my 5-year-old daughter, she loves these knock-knock jokes that just go on and on. Every time we have the opportunity, these are the ones she falls back on.
Tane: The classics.
Jason: Yes. If you have kids that you can share them with, they get a kick out of it. My friend, Dean, that I bring on the program every once in a while, he doesn’t think they’re very funny, but it puts a smile on my face and darn it, that’s all it matters these days. Tane, I wanted to talk to you a little bit about your book, Double Your Retirement Dollars. I mean, this is such a critical issue, especially for today with baby boomers retiring, one of their biggest assets is their home. They’ve got a lot of money tied up in those and so we need to talk about some of the different ways that maybe they can access that equity if they’re thinking about buying a new home or a vacation home, but before I do, I think it’s important. I really appreciate the fact that you’ve made this opportunity available for our listeners to get a copy of your book. Tell our listeners a little bit about why you wrote the book and then also how they can get a copy of it.
Tane: Right. I wrote the book … In the book, we’re going to talk about today, is home equity conversion mortgages or HECMs otherwise known as reverse mortgages. Before you run away and head for the door and turn off your radio, please stop. This is a different kind of loan than what you’ve heard about at the nightly news or negative things about reverse mortgages. I wrote the book because there’s lot of misconceptions out there about these types of loans and products.
In the book, there are multiple stories of how people have used this program as a financial planning tool to use in retirement to create cash flow, create income, to save additional cash and invest it. These are some things hopefully we’ll be able to talk about and touch on today. As far as the book goes, the offer for your listeners is for them to go to your website, I believe. At the end, we’ll give that information or we can do it now.
Jason: Yeah. Folks, if you want to go to soundretirementradio.com, under the show notes for this episode, we all put a link there and Tane will make his book available to you, if you’d like to read that. I should let our listeners know, one of the reasons that I know Tane is because I work with … A lot of the people we serve, tend to be higher net worth individuals and a gentleman came to me, very high net worth individual, and told me that he was considering working with Tane for one of these HECM mortgages.
A HECM mortgage is a unique way to structure a loan, and we’re going to talk some more about that, but like Tane was saying traditionally when you hear the term reverse mortgage, and we’ll talk about the traditional way that a reverse mortgage is also used, but usually, I’ve always thought of that as a last resort option for people, Tane. That’s the very last thing they do when everything else has gone awry. Why don’t we start out talking about the traditional use of a reverse mortgage? How they came about? How people have traditionally used them and your experience with those?
Tane: Great. The historical use of reverse mortgage, and I like to call them home equity conversion mortgages. I mean, it just sounds so much better. It rolls off the tongue much easier than a reverse mortgage. When you think about reverse mortgage, people get nervous. They think that the bank is going to take my house and so …
Jason: Is the bank going to take their house?
Tane: No. The bank will not take their house. The bank does not want their house. They have plenty of houses right now that they can’t get rid of.
Jason: Let’s talk about some of these negative misconceptions because from the phrase, reverse mortgage is something that is not very well thought upon and for good reason. There’s probably a time, I know that they’ve changed a lot over the years like a lot of financial vehicles have but what are some of the most common negative misconceptions you hear about reverse mortgages out there?
Tane: Right. There’s always a little bit of truth in the misconception, so back before FHA, the government got involved. These loans are FHA insured now. Before the government got involved, there were issues where unscrupulous lenders and bankers would actually acquire that equity and ultimately acquire the home in that sense when someone has either passed away or even before they had passed away. There’s a lot of scams out there and issues where … There is some truth based in the fact that people are nervous that they’re going to lose their home or give it up to the bank.
Since FHA got involved several years ago, and there were really no other private reverse mortgages out there these days, given the secondary mortgage market, there just isn’t that demand in the market place. They want government insured loans. FHA got involved to make sure that these loans, people would keep their homes and they would not lose them that they would actually benefit from them. Actually, Ronald Reagan, wrote this into law or had it passed to offer reverse mortgages through FHA.
Tane: Some of the misconceptions are, “Yes, I’m going to lose my house.” That’s not true. You are entitled to your house. You get to keep your house. It’s just like if you had any other normal, traditional mortgage on your house, the only different is you don’t make a payment on this loan. Other misconceptions are, “My kids are not going to end up with any inheritance.” That could happen, and we can go into details of how that can happen and how it cannot happen but essentially, these loans, the interest is that’s charged on these loans just to cruise on the balance. Depending on, if you live to be 120 years old, you might not have any equity left in that house because the mortgage payment is being made through the equity in the home. You’re not writing a check each month for that mortgage payment.
Jason: Okay. Do you have any stories that you could share with us for like a traditional where you see somebody has traditionally used a reversed mortgage and it was a good fit? I got to tell you, Tane, there’s a lot of people out there that are aggressively selling reverse mortgages as though it’s like the magic ball that fixes all problems. On this program, we don’t want to do that. We want to give people a genuine, true, the good, the bad and the ugly. Give us a good example of a situation where it just really made good sense for somebody to consider one of these reverse mortgages.
Tane: Right. I would be the first to say that these loans and these products are not for everyone just like in the other financial investment is not for everyone. It depends on your own situation. I can give you an example of a recent woman that I helped, and she’s a 71 years old and. I called her Slow Pace Sally, really. I mean, unfortunately she had $3,200 in monthly mortgage payments going out. She had 2 mortgages, a first mortgage and a second mortgage. She had $1800 per month in retirement income.
It doesn’t take it too long to figure out that math equation. It’s pretty backwards. It doesn’t work for very long. In fact, she had talked, and this happens a lot when I work with people, they sit on it. It’s a big decision but for her she sat on it for 2 years and then came back to me and said, “I’ve just exhausted all my retirement funds. I’m down to $3,000 in my IRA and I really feel like I got to do this reverse mortgage.
Her sense is still I’m going to lose my house, I’m going to give up my home to the bank, and even after educating her, she still was so fearful around this particular program because she’s like talking to her neighbors and her friends and her sister, brother about it and they’re all saying, “Those are the worst thing. You don’t want to that.” What they don’t know is that she is losing money every month trying to feed this mortgage. She had a choice. She could sell her home and go rent somewhere but if she was going to rent a house, not even comparable to where she’s living right now, that rent would be $1,000 or more per month.
A home equity conversion mortgage for her was a great answer. We were able to combine both of the loans that she was really late on. She was behind on her mortgage payments. We’re able to free those mortgages up by paying off the traditional mortgages with a home equity conversion mortgage. We replaced what she’s paying right now in monthly mortgage payments, which is $3,200 a month and we wipe those clean. She has no monthly mortgage payment. She gets to live in her house as long as she is alive. She can stay in that house and not have to make a mortgage payment. That was more traditionally used of a mortgage or a home equity conversion mortgage to retire a mortgage and stay in her home.
Jason: All right, Tane. We need to take our first commercial break and then we’ll have you back some more. We’ll take some more about HECM loans.
All right folks, welcome back. This is Jason Parker. I am the host of Sound Retirement Radio. I sure appreciate you tuning in to this program where we are always looking to bring experts on to the program that can add significant meaningful value to your financial lives especially as you prepare for in transition into retirement.
Retirement as I’ve learned from working with folks is all about cash flow. It’s not your net worth that will determine your lifestyle and I have Tane Cabe as a guest with us. Tane is a mortgage expert. He specializes in the HECM loan and he’s the author of the book Double Your Retirement Dollars. Tane is making the book available. Tane is that no cost for the book or are you charging for it?
Tane: Not charging for it.
Jason: Okay. If you’d like a free copy of his book, you can pick that up at soundretirementradio.com. In the show notes, we will have a link and you will be able to request a copy of it. Tane, we were talking about the HECM loan. You were just giving an example of somebody that didn’t have enough money coming in every month to cover all of her expenses. She had depleted all of her assets. Let me give you a quick example doing financial advising where I’ve met a couple. Probably similar to that story.
These folks were in their mid-80s. Their car was 25 years old. They had cancelled their cable television. When I met with them, it was with the couple, the 80-year-old couple and their adult daughter. When folks start getting up their age, it’s always good to have the adult kids involved if the parents feel comfortable with that. They were at a point in their financial lives where they owned their house outright. They didn’t owe anybody any money which was a great place to be but they had run out of money in their retirement accounts.
All they had to live on was their social security. I’ll never get what they said to me is they said, “Jason, we are considering not taking all the prescription medications that our doctors tell us we need to take. We’re just going to start splitting the pills in half and only taking half of what we’re supposed to be taking to try to help save money and make that last longer.” That’s when the daughter said, “Hey, I’ve heard about this reverse mortgages. Might this be a solution for my parents?”
We talked about the pros and the cons and like you said any financial decision is going to have advantages and disadvantages associated with it. After going through that process, their daughter said, “Mom and dad, we’re not worried about you leaving anything to us, what we want is for you to have a good lifestyle. We want you to be able to take the medication and get your car fixed when it needs to be fixed or buy a new car if necessary.”
A reverse mortgage for these folks, they had been living in this house for so long, they didn’t want to move out of the house they’ve been living in. All this money was trapped in their house and if they took a traditional mortgage out there, we’re going to have a payment. For some folks if they get into a tight spot and what a wonderful thing that these types of vehicles exists for that type of client.
That’s the type of person I have always traditionally thought of these tools being applicable for, those folks that have depleted their resources but what I really want to bring to our listeners’ attention is some of this other planning that you really specialize in because I know you’ll help people on the lower end of this. The people that are really struggling and that’s 1 need and 1 fit but I really want to talk some more about the HECM conversion loans and how higher net worth people are looking at these tools. Tell us a little bit more about that?
Tane: Let me touch on what you had just talked about where the adult children are involved. In the case the story I just told about Sally, her son was there. We sat down together and reviewed everything, all the numbers, and how it would work for her. He was an advocate. He said, “Mom, you got to do this. We don’t care about having your house in equity when you pass away. We want you taken care of right now and we want you to stay in your house to be able to garden and do the things you enjoy around the house that you’ve essentially built.” Yeah, I would agree with that. We see that more often than not where a lot of times the children just want what’s best for their parents.
Jason: Yeah. The other side of the equation are these higher net worth people that are saying, “Boy, here’s a financial tool that we can utilize to maximize liquidity, maximize our cash flow. Let’s talk a little bit about some of the different ways you’re seeing people use these tools?
Tane: Right. Here we are in Washington State and especially as we’re doing this program right now, it’s November and it’s cloudy and it had rained solid all night long. When the rain is hitting the roof, a lot of times people want to get out of here especially in retirement and head south.
Tane: I’ve heard that.
Jason: If they went out of Washington in the winter, imagine that.
Tane: Yeah. Exactly. I can tell you about a friend of mine who is retired and has a fairly sizable net worth, 7-figure net worth but the problem he found when he went to go buy a condo in Tucson, was he couldn’t qualify for a mortgage because he took money out when he needed it. He couldn’t verify through traditional financing income. He was stuck and he was frustrated because he’s never been turned down for loans before but in his case, in another cases, we can look at this home equity conversion mortgage to buy a home.
Now, it has to be owner occupied so in his case, he’d have to made that condominium his primary residence and it truly has to be his primary residence but a lot of people, what they don’t understand is that they can buy a home for using a home equity conversion mortgage. Traditionally, if we think about this, a retiree if they buy a house or buy a real estate, they’ve got 2 choices. They can pay cash or they can get a traditional loan. Most retirees do not want a mortgage payment in retirement from what I understand anyway. Would you agree with that?
Jason: Yeah. I mean, ideally. In a perfect world, you retire, you’ve got all this money in the bank, you’ve got great income, and you’ve got no debt. I mean, that’s the perfect picture.
Jason: Unfortunately, given the last 10 years of economic reality for a lot of people that’s just … They don’t have those types of resources.
Tane: Right. One option is pay cash so there’s no mortgage payment if possible if you’re buying a new home. Another is to put as much money down as possible so that A, you qualify for a traditional mortgage and B the mortgage payment is significantly lower. It’s manageable expense each month. The third option that we have now that a majority of the people don’t understand this. In fact, if you ask your real estate agent about this, I would bet that they do not even know about it or have never heard about it.
That’s using a home equity conversion mortgage to purchase property so if we look at someone with a home that, let’s say, they’ve raised their children in. It’s a large home. It’s multiple floors. It’s on acreage.
It’s just too big for 2 people so they end up selling their home. What they think is they’ve got to sell their home for cash so that they can pay cash for the next one and it has to be an even exchange. With the home equity conversion mortgage, they can sell their house and put half down on the purchase that they’re making and make up the rest of that purchase with a home equity conversion mortgage where they will never have a mortgage payment on that home as long as they live in the home.
Not only that, the qualifying is they don’t have to verify income. They just have to verify their age and they have to verify that they have the cash down, verifiable cash down for the purchase. There’s going to be some changes coming up. They’ve been postponed as far as verifying income. FHA is starting to get a little bit more strict on that but they haven’t implemented those changes yet but we can talk about that.
Jason: Yeah. Boy, that just brings up some of those red flags during the financial crisis before the financial crisis. Everybody and their brother was getting a loan without having to verify income. It makes you think, boy, there’s still loans out there that people can get where they don’t have to verify their income in order to qualify for them. That’s what you’re saying is the case with these HECM mortgages. Should that be making us nervous about …
Tane: Yeah, it should make us a little nervous only the fact that these loans work well in an interest rate environment that’s relatively stable and in a real estate market that’s relatively stable. We have a downward trending real estate market. We’re going to have issues potentially because the balance on these loans rises overtime. Verifying income is not necessary because it’s a non-recourse loan and we just verified the cash down. It’s really an asset based loan. People when they used these home equity conversion mortgages to purchase homes, they’re putting 50% down.
On a $300,000 purchase, they’re going to put $150,000 down and there’s no required monthly mortgage payment. They’re not required to make mortgage payment so there’s no default, the only question is how much interest will accrue overtime? How long will they live in a home and then at the end is there equity left or not? If there’s no equity left, if the $300,000 purchase is now they owe 500,000 on it and it’s still worth 300,000, there’s $200,000 that’s a shortfall.
That’s where the FHA insurance kicks in, the purchaser, the buyer of using a home equity conversion mortgage pays for that insurance up front but that insurance pool, needs to be managed properly and of course the FHA is managing that so in an upper trending, real estate market or in a reasonably stable real estate market, we’re okay but in the last few years when we saw real estate values drop dramatically, the FHA insurance pool has been hot pretty hard because people were having these situations where they owed more on the house than what they’re worth. They’re not liable for that but that’s again, FHA insurance pool is going to be used to cover that.
Jason: I think that’s something that we need to talk some more about because I know that that’s a big concern for people so let’s say somebody took out a reverse mortgage. At the time, their home was worth 300,000. Let’s say that loan has been growing overtime like the example you gave and now they owe $500,000 on the house but the house value has not appreciated at all. It’s still 300 so they’re $200,000 upside down on this thing.
Now, I know these numbers are pretty unrealistic because the way that they structure the loans are probably never going to get to that type of a situation but just so that our listeners really understand, one of the big concerns that I hear from people when they’re considering this is, “Geez, now my kids …” Let’s say they inherit … “We die, our kids, our beneficiaries, they receive this house. It’s only worth 300,000. We owe 500,000 on it. How are our kids ever going to get out of that $200,000?” Are they going to have to pay it back? What’s going to happen?
Tane: Right. Years ago, when FHA got involved, they wanted to get involved to avoid this situation. On traditional FHA loans, there’s insurance premiums paid and that insurance for home equity conversion mortgage, otherwise known as reverse mortgage are paid to protect the investor as well as the home owner or their heirs. This is a loan where if there’s a $200,000 shortfall or the way you put it Jason, upside down, then that $200,000 would be paid to the … The $200,000 would be covered by the FHA mortgage insurance.
Jason: The kids are not on the hook for it?
Tane: The kids are not on the hook for it. They’re not liable. This is a non-recourse loan. If anybody knows about commercial lending, non-recourse loans, I mean, they’re not personally liable for it. The homeowner and the purchaser of this home using a home equity conversion mortgage is not personally liable for this particular balance.
Jason: Was there a time when these mortgages were privately being offered and they were not FHA that there could be a recourse loan where they could go after the people if there was a negative balance. Was there a time when that was the case?
Tane: Yes, there was. That’s why FHA got involved to prevent that because there was a situations where people were losing their equity or the banks were coming after their heirs for that balance. That will not happen with an FHA insured home equity conversion mortgage. That’s really honestly the only way I would do this type of a loan to make sure that the children are taken care of. They’re not going to be left with a burden should there be a negative equity situation.
Jason: Yeah. Tane, I can’t believe we’re already at that time once again where we need to take a quick commercial break but we’ll take that break and we’ll be right back after this.
All right, folks. Welcome back. This is Jason Parker. The host of Sound Retirement Radio. I sure appreciate you tuning in. I’ve got Tane Cabe on the program with us. He is a HECM mortgage expert and he is the author of the book, Double Your Retirement Dollars. You can get that book for free. Visit soundretirementradio.com. Under the show notes, we will have a link. You can request the book and Tane‘s office will send you one of this books for free. It’s actually a really good read and one thing I like about the book, Tane, is you give a lot of different examples of situations where this type of planning has worked for people and where it’s been appropriate.
Some of the different ways people can be thinking about the equity that they have in our home, if they don’t want to sell their house. I mean, selling your house is one option for unleashing some a lot of this equity that people have a reverse mortgage. Now, one of neat things that I think is when you have this cash flow coming in, if you use a reverse mortgage for income. Let’s talk a little bit about that because in some cases people … You mentioned the person where she used a reversed mortgage to pay off the remaining balance for the loan so that she didn’t have a payment anymore but what about the people that they don’t have any mortgage right now but they need more income, they need more cash flow? How does that work?
Tane: Actually, that’s how the traditional reverse mortgage or home equity conversion mortgage was set up in the first place was to create monthly cash flow. People use often times like we discussed earlier to pay off an existing mortgage and then not have that mortgage payment. With a traditional reverse mortgage, a lot of times people will use a monthly payment that comes in to them every month as long as they live in the home. There’s actually 3 different ways to get the money out. One way is to get this monthly tenure payment.
That’s a fixed payment. That’s calculated based on the borrower’s age of the youngest borrower. The minimum age to require to qualify are 62 and both borrowers need to be 62. There may be others out there that will do these loans if one the spouse is younger. I just won’t do that. There’s too ,much risk involved with that. First way would be to get a tenure payment and that …
Jason: Hold on now. You just picked everybody’s interest.
Tane: Didn’t I?
Jason: Risk involved if both borrowers aren’t 62. What are the risks?
Tane: The risk is, and there’s been a couple of lawsuits that were brought against FHA and there was a settlement and the settlement was where the older spouse was the only one on the home equity conversion mortgage. Now, the loan is due and payable when the borrower moves out of the home permanently. That can be done of course through death or just moving on to a different home. Then you’ve got to pay off that balance. In these cases the spouses of some husbands that had passed away didn’t realize that it was due and they were in a hardship.
Jason: The spouse wasn’t on the loan?
Tane: The spouse was not on the loan.
Jason: As long as both people are in the home, they can both live there until they die and the bank can’t do anything but if only 1 person is on the loan and this is a well spouse or the other spouse is not on the loan then …
Tane: Then they’ve got to sell that home to pay off that balance or get a traditional mortgage if there’s equity in the home or pay cash. They’re stuck and that’s the problem. They are not only mourning the death of their spouse but now they’re going to be left on the curb so to speak.
Jason: There’s always going to be nuances. Some people are going to hear this and they’re just going to say, “I’m never going to get one of these things.” Maybe that’s a good thing. Maybe you shouldn’t ever get one but I think it just goes to say how important it is to work with people that are going to tell you and the bad and help you make a really educated decision and they’re not just going to try to sell your product because they’re trying to feed their family. Unfortunately, Tane, I hate to say this but there’s a lot of people out there in your industry that act that way.
Jason: It’s all about driving the fanciest car they can get and selling as many products as they can get.
Tane: Right. Investor is the secondary market, FHA is still allowing a non-qualified spouse meaning they’re too young. They’re maybe 50 years old and the other spouse is 62. Then qualify and they’ll accept those loans. I just won’t do it. That’s just where I’m at.
Jason: That’s good to know.
Tane: Getting back to how to get the money. We’ve got the tenure payment. That’s a fixed monthly amount based on age and equity in the home. Let’s say that’s 800 to $1,000 a month. Whatever that dollar figure is, that comes in as long as the borrower lives in the home. If they live to be 150 years old, they’ll keep getting that monthly payment regardless of where their equity position is. They could have, like we talked about before, $300,000 valued home and owe $500,000. That monthly payment would still coming in.
The other way is to get a line of credit. We all are pretty familiar with that. If you had a line of credit in the last few years, chances are a traditional line of credit it has been cancelled. The nice thing about this type of line of credit is it can never be cancelled. One way to access that line of credit is just request the money. Another interesting feature about the line of credit is that it has a growth … It’s not a growth rate but it has a percentage of roughly 4.5% that it can grow or increase an amount by 4.5% each year.
Let’s say you had $100,000 line of credit and didn’t use it, that unused portion, $100,000 would have $4,500 added with an extra. You have more money that you can access. The assumption is your property value is going up. That’s just the way this work which is odd but that’s the way it works. The government figured out this calculation so we can thank them. It’s an interesting feature.
Jason: I remember George Bush used to talk about fuzzy math. It’s definitely fuzzy. That’s okay. I mean, that’s a good feature for the people that are getting the loans. They have more money to spend. If they’re not using it, they have more money available to them the next year.
Tane: Right. Then the third option is they can of course get a lump sum. There has been restrictions as of October 1st, 2013, this year of getting a certain percentage that you can’t take it all upfront. That has been some of the challenges with the insurance pool being drawn upon dramatically in the last few years.
Jason: It’s tax free income, right? If they take this line of credit option, they’re pulling money out every month for living expenses. That’s not going to account against them from a tax standpoint.
Tane: That’s a really good point. A lot of people say, “Am I getting taxed on this?” No, because it’s considered loan proceeds. It’s not income per say. You don’t have to put this on your tax returns or claim it.
Jason: Wow. You have $100,000 sitting in dividend paying stocks kicking off 3 1/2% and you’ve got a little bit of income coming in often which is nice but then you’re going to have to pay taxes on the income. You stick the money and payoff the mortgage and take a reverse mortgage out and I’ve got cash flow coming in. It’s tax free income but the reality is you could be given up an asset. You could be losing your house overtime because that loan is growing. If the value of the home isn’t keeping pace with the loan growing, you can necessarily loose the house but you wouldn’t have any equity left in the house, a probably better way of saying it.
Tane: Yeah, definitely. You’re not going to lose the house. Let’s be clear about that. You can stay on that house and if you gave to move to an assisted living situation or you want to just downsize even further, you can do that. You’re not going to having to pay anything other than what’s owed on loan or what the sales price, the market value of the home is. If there’s a shortfall, again you will not have to pay for that. The insurance fund will cover that.
Jason: A gentleman I met recently said he was thinking about selling his house and using a HECM loan on this to purchase his next house. I know you touched on this moment ago but do you have a story or something you could share with to our listeners because you mentioned when you buy a home using a HECM mortgage, you have to be 62, right? If you’re not 62, this isn’t going to work.
Tane: That’s right.
Jason: Okay. Assuming husband and wife, they’re 62. Let’s say they’re going to sell their house in Washington for $500,000 and they want to buy another house. You know what I hear from people a lot of times today, is they say, “Jason, we have way too big of a house. We want to downsize. We want something with less maintenance, that’s easier to maintain, that’s 1 story, that we can spend the rest of our lives in,” because a lot of times people still have this great big 3, 4 or 5,000 square foot homes and there’s 2 people living in them. They’re getting lost trying to find the bathroom.
Tane: Yeah, right. That’s crazy.
Jason: You’ve got this situation where somebody, they have a $500,000 here. Let’s say they don’t owe any money on it. They’re going to sell that $500,000 house because they want to downsize. They want to buy something smaller on a golf course in a sunny place. Imagine that.
Tane: Yeah, sunny place.
Jason: Walk us through if they decide that they don’t want to do the traditional financing. Obviously they sold their house for 500,000 so they could just go buy this smaller house now, a 300,000 house. They could just put $300,000 cash down have no mortgage payment, right?
Tane: That’s right.
Jason: That’s one option. What would be another option using the HECM loan to do that?
Tane: Is the assumption that they’re going to buy this house at a comparable price 500,000 or [crosstalk 00:36:33]?
Jason: I was thinking they’re going to downsize so they 500,000 house, they’re going to buy a $300,000 house because they want less house. They’re looking at it and they’re saying I don’t know if I want to tie up $300,000 in the house. They want to finance it maybe.
Tane: Yeah. using the home equity conversion mortgage, this is really where I talk a lot about in the book, the whole first half of the book is dedicated to how people have used this particular program to do exactly what you’re talking about Jason on buying a house and using home equity conversion mortgage to do it versus paying cash.
Jason: Let’s tell some of the stories. We need to take another quick break, Tane, and we’ll be right back after this.
All right, folks. Welcome back. This is Jason Parker with Sound Retirement Radio. Find us online at soundretirementradio.com. I have Tane Cabe in the studio with me today. Tane is a mortgage expert. He’s the author of the book, Double Your Retirement Dollars. He’s a HECM loan expert. HECM, ho home equity conversion mortgage. Tane is making his book available for free, for our listeners if you would like to check that out. You can go to soundretirementradio.com. We’ll have a link up there under the show notes. You can request a copy of this book.
Tane, we were just about … You were going to tell some stories about some higher net worth people. They just sold their house for $500,000. They’ve got all these cash. They want to downsize, buy a smaller house for $300,000. Talk us through a scenario how they might use the HECM loan?
Tane: Right. Before we just went on the break there, I was just saying how … This is really what I wrote the book for is to educate people on this particular scenario where you can use a home equity conversion mortgage to purchase a home. This is really where it gets exciting. I mean, the reverse mortgage industry has focused on the needs base borrower and really penetrated only 2%. This is the other 98% of the people out there maybe higher net worth individuals like you’re talking about. They sell their house for $500,000 and they’re going to downsize and buy a $300,000 home.
In this situation, they can pay cash like we talked about before. They can get a traditional mortgage by putting a large amount of money down, having traditional financing, having a smaller mortgage payment or they could use a home equity conversion mortgage. In their scenario, let’s say, if they’re 62, they’re going to have to put down roughly 50% of that 300,000. They’re going to put down $150,000 and the rest of that $300,000 purchase will be made up in the home equity conversion mortgage with no monthly mortgage payments.
Jason: Retirement is all about cash flow so this is how do we put people in a position where they have as much money in their pocket as possible to have the lifestyle that they want yet keep their monthly obligations down. They buy this $300,000 house but they’ve only had to put $150,000 down. Now, they have no mortgage payment for the rest of their lives?
Tane: That’s right. For the rest of their lives as long as they live in this house.
Jason: What’s the downside? What’s the catch?
Tane: The catch is that $150,000 mortgage balance will grow every month because they’re not making a mortgage payment out of pocket. The mortgage payment is actually being made up in the equity or cash that they put down. That $150,000 mortgage balance would be, let’s say, $160,000 in year 2 and a hundred, whatever, thousand in year 3 and even grow and grow.
Jason: A fixed rate or is that a variable rate?
Tane: You can do either one. In that scenario, most clients are going to choose the fixed rate because it doesn’t make sense to do a variable rate. The only time it make sense to do a variable rate is getting a line of credit and using it with flexibility and that sort of thing. In this situation, be a fixed rate more and likely and the fixed rate on these loans typically is about 3/8 to 1/2% more than you can get in a traditional mortgage but at the end of the day, it’s fixed and it’s not an interest that you’re paying out of pocket.
It’s just growing on the balance and you’re not again liable for that balance if it goes greater than the market value of the home. In this situation how much money are they going to have if they sold their house for 500,000 and they put 150,000 dollars down on a 300,000 home that they now have no mortgage payment on.
Jason: You still have $350,000 in their pocket.
Tane: $350,000 and ask the listeners if they could think of anything to do with an extra $350,000.
Jason: Yeah. This scenario that we’re talking about is really actually something very similar to somebody that I personally know that is considering going down this path. What really makes their situation unique, and like so many people that we meet with is for a lot of people, it’s important for them to leave something to the next generation, to their kids or grand kids. A lot of people tell me, they say, “Jason, my kids or my grandkids don’t necessarily want my house. What they want is the money. What happens is when they get the house, all they end up doing is having all this … They have to spend all this time and energy to sell the house so they can get the money out of it.
In these guys case, they’re looking at this and they’re saying, “Instead of paying 300,000 for the cash, I can keep 150,000 in my pocket. I can put 150,000 down. I don’t have any mortgage payment. I can live in the house the rest of my life. My kids don’t want the house anyways. They just want the money.”
Jason: Even if the thing goes upside down. Let’s say the house doesn’t appreciate it at all. I mean, the bank is on the hook for that or the FHA. Their insurance is on the line for anything that goes above it. Like anything, it’s amazing. There’s a lot of financial tools out there. A lot of people really don’t understand all the intricacies on how these things work.
Tane: That’s right. This particular program has such a negative connotation to it that it’s so hard to get people to listen and that’s why I wrote the book so that they could at least read stories of real life people who ’have done this.
Jason: Give us another example of somebody you’ve worked with.
Tane: Another example just recently, I had an individual, single man and he’s 88 years old. he sold a big home, like you said 2 stories on acreage. He had an acre on the lake. He’d been there for years and it was just too much for him. He was bored out there and I asked him, “Why are you moving?” He said, “I want to move to the city.” He moved to Tacoma and for this guy, he ended up selling his house for $600,000 to a cash buyer. He owed money on that house. He was making a monthly mortgage payment on it and that monthly mortgage payment was pretty significant. I want to say it was about $1,000 a month.
He then went and purchased this brand new single level home. He got to pick his colors and pick his flooring and all that stuff. He was really excited about that. It’s a homer’s association where they actually mow your grass for you. They take care of all of that. He’s in a gated community now with people that he gets to be around and have fun with and he’s going to have a lot of fun going around and having parties and that sort of thing. He’s the kind of guy and he’s 88 years old. I’m like this is great. When I’m 88 years old, I’m hope I’m this guy.
He has no mortgage payment on the $418,000 house. He put $158,000 down. He had $200,000 extra cash that gets to do whatever he wants with. I said, “What are you going to do with that money?” I’m going to live off it and I’m going to have fun. It was a great story and it’s just one after another like that where people just when they realize this. He said, “My sister thinks I’m crazy for doing this and my friends think I’m crazy for doing this.”
I hear this all the time. They just don’t understand. They don’t know what they don’t know. They hear it on the nightly news that someone lost their house because they got a reverse mortgage. What they don’t hear is the truth so hopefully the truth has been exposed here today.
Jason: That’s what we’re always looking to do, bring experts on to this program that can add significant meaningful value to our listeners lives and give you all of the information that you need to make a good educated decision with any financial vehicle. I don’t care if you’re buying stocks or bonds or mutual funds or a traditional mortgage or HECM mortgage or reverse mortgage, call it whatever you want. I don’t care what you’re doing. There’re going to be a downside to it.
There’s always advantages and disadvantages to every financial choice we make and it’s our job, I think, especially on this program to really give our listeners good advice so that they can start down this path because what I found, Tane is when people have access to good information, they make better decisions, number 1 and number 2, they have a greater sense of confidence about those decisions they’ve made. Ultimately when you’re making good decisions, You have a high level of confidence, you get to experience a greater degree of freedom and ultimately that’s what we want for our listeners, that’s what we want for our community. I really appreciate your expertise on this subject. We’ve got a couple minutes left.
I do want to remind our listeners, you can get a copy of Tane’s book for free by visiting soundretirementradio.com and click the link under the show notes to request a free copy of his book called Double Your Retirement Dollars. There might be some people that just want to buy the book, Tane. Where can they buy the book?
Tane: If they want to buy the book, they can go on to amazon.com and purchase it for 16.95.
Jason: All right.
Tane: If you’d rather to do that, that’s totally fine.
Jason: See how savvy these people really are.
Tane: This is a test.
Jason: Anything else that you think is important that our listeners know before we end the program this morning?
Tane: I think that as I work with people in this demographic, I mean, they don’t make decisions and above all they make decisions by asking their friends and family just like I mentioned in the previous story, what do you think about this. I would caution you in doing that without handing them a copy of my book or at least having an opportunity to explain that you’re buying a home potentially or using a home equity conversion mortgage to purchase a home where you’re not going to have a mortgage payment.
It’s something that you feel is a viable tool. It’s an FHA government insured loan and it’s the real deal. Give them a copy of the book. Let them read it. Let them read the stories in there. You don’t have to read the whole thing cover to cover. You can read a few chapters in a really good sense of how this program works. There’s government websites on FHA websites that go into all the detail how you can use this program to purchase a home. We’ve been pushing that but in the second section of the book, there’s certainly a number of other strategies from setting up a legacy and leaving money to your estate and your kids.
There’s different strategies in doing that and buying investment property, another thing. One of the strategies that we didn’t touch on is buying a multi-unit property and living in one of the units. I mean, if you’ve purchased a 4-plex for example using a home equity conversion mortgage, you can live in one of the units so you’re occupying the property, rent out the other 3 as long as you’re okay with living in a 4-plex. You have just created yourself a nice tidy little cash flow income for retirement.
Jason: You’re living in your 4-plex, there’s no cost to live there. You’ve got 3 people paying your rent. Boy, that sounds pretty good.
Tane: I know. Buy a 4-plex on [inaudible 00:48:36]. Probably too much money there. The rent would be what, $1,500 a month for each unit or in Silverdale for maybe 500 a month. I mean, it’s real money. There’s no monthly mortgage payment on that particular product.
Jason: The cool thing about that idea too is it fosters the sense of community which is so important to people and it becomes more important to people as they transition through retirement. This opportunity to connect with people. It’s awesome getting to work with people that are retired. I have to tell you it’s life changing. It’s been life changing for me and I sure have appreciated the opportunity.
Folks, as always, I hope that you found some value in this program today. If you did and you listened us through iTunes, I’d love if you’d write us a review in iTunes or give us a star review. Let other people know that you appreciate the program. If you want to call us please by all means give us a call. Let me know you like the program. Send me an email. Post a comment on the show notes. If you think this is a bunch of malarkey and we didn’t cover something, post that on the show notes too.
I’m in the middle of the road on all this stuff. I don’t say it’s good or bad, I just want people to know the facts and then they can make the decision for themselves whether or not it’s appropriate for their situation. Tane Cabe, I want to thank you for the work you’re doing here in our community, for the fact that you wrote this book so you’re helping people around the country and for providing some good advice for people. Thanks for being a guest on Sound Retirement Radio.
Tane: My pleasure. Thank you, Jason.
Jason: Folks, until next week. I sure appreciate you tuning in.
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