Jason interviews Tane Cabe about the pros and cons of reverse mortgages.
Below is the full transcript:
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 here in Kitsap County, welcome back to another round of Sound Retirement Radio. My name’s Jason Parker and I’m excited to have you here. You’re listening to Episode 81, Episode 081. We’ve got a great guest for you. As you know, we’re always looking to bring experts onto the program who we believe can add significant meaningful value to your financial life as you prepare for and transition through retirement.
I want to remind you that we’re going to be doing a webinar at the end of this month. One of the themes for 2016 is to focus on one subject, go really deep on that one subject for the month. We’re going to finish the month with a webinar, so for our listeners, if that’s something that you’re going to want more information on this topic, you can visit, it’s online at SoundRetirementPlanning.com and sign up for the webinar. Then for folks, all the good people here in Kitsap County, we’re going to have a live event. We’re going to have a speaker come out.
We’re going to talk to you about this particular issue so before we get going though, I always like to renew our minds in the morning so this is a good verse for us to start with. This comes from 1st John Chapter two, verses five and six: “But if anyone obeys His Word, love for God is truly made complete in them. This is how we know we are in Him. Whoever claims to live in Him must live as Jesus did.” That’s a tall order.
Okay, and then, of course, wouldn’t want to start off without a joke, just to put a little smile on your face. Maybe you’re going to go visit with the grandkids today, so here’s a good old fashioned Knock, Knock Joke: “Knock, knock.” “Who’s there?” “Mikey.” “Mikey who?” “My key doesn’t fit in the keyhole.”
All right, there you have it.
Episode 081, this is Reverse Mortgages: Pros & Cons. I have Tane Cabe on the program. He is author of Double Your Retirement Dollars. He’s a Manager at Church Hill Mortgage and he just happens to be one of the top HECM Loan producers in the country for the purchase of a retirement home.
Tane Cabe, welcome back to Sound Retirement Radio.
Tane: Thank you, Jason. It’s great to be back.
Jason: Absolutely. We really appreciate having you and, Tane, this is an important topic. I know now more than ever with 10,000 Baby Boomers retiring every single day, HECM Mortgages, Reverse Mortgages as they’re sometimes referred to are … They can be an important planning tool, so I want to just start out with a really basic question which is when is it appropriate for someone to consider a HECM, Home Equity Conversion Mortgage?
Tane: Right, it’s appropriate to consider the Home Equity Conversion Mortgage when you’re looking at how would this integrate to overall retire plan, when someone may need or would like to have additional cash flow, maybe some additional liquid assets. A lot of times, what we do, I think is retirees look at the home as a sacred entity not to be touched and not to be considered into the financial, overall financial plan for retirement but like you, Jason, and others, I mean it is something to be considered because it is such a large asset.
I mean at last count, I was reading the other day, it’s about $4.3 trillion in Home Equity for retirees right now, which has come back in the last few years, which is great but that’s a lot of wealth tied up in the walls and foundation of a home.
I think it’s good for everyone to at least take a look at it and see if it does make sense for them and their overall retirement plan. Then for those who are considering right sizing their home, maybe they’ve raised the kids in a large four bedroom, two and a half bath, three storey, 3,000 square foot house on acreage or what have you and it’s just too big for two people or sometimes a single person. Selling that [inaudible 00:04:31] typically with a lot of equity in it and purchasing the next home, maybe a retirement home, that’s a time to consider using a Home Equity Conversion Mortgage or HECM as I like to refer to it.
There’s all kinds of opportunities, whether selling and moving to a new home, buying a new home or whether staying in your home, it makes sense to consider Home Equity Conversion Mortgage.
Jason: The first part, the first question was when is it appropriate? The second question or the follow up to that, Tane, is when would it be inappropriate? When are those times when it probably is not going to make the most sense for people to consider that type of a loan?
Tane: Right, I think the inappropriate time would be, let’s say someone is considering moving in the next three to five years. Placing a Home Equity Conversion Mortgage on their existing home doesn’t make sense in that case. The reason is it just the time and effort and cost associated with setting this up, it doesn’t make sense to do this on a short term situation. If someone’s not sure they’re going to stay there in the home for three to five years, it wouldn’t make sense.
Other times when it might be inappropriate would be … Let’s see, probably when someone would be maybe buying a second home and it’s not a primary home. This particular program is specifically for a primary residence and you’ve got to occupy the property the majority of the time and it’s got to be your sole primary residence. It would inappropriate at that point. Other than that … I can’t think of any other time that it wouldn’t make sense for someone to consider.
Jason: What about though if they have a family home that’s maybe been in their family for a couple of generations and it’s really important to hold onto that asset?
Jason: Would that be one of those areas where you’d say, “Hey?” If it’s really important to pass the home onto the kids then maybe not consider it?
Tane: Yes, yes, thank you for bringing it up.
Jason: One of the things I find, too, is that what a lot of people say is that’s usually not the case. I mean in some instances, people have these beautiful waterfront homes and they want to hold onto them forever but sometimes what I find is they say, “You know what, Jason, our kids, when they inherit this, they’re probably just going to sell the house and split the difference between the two of them.”
I think it’s really important to get back to what Tane originally said, which I think was great advice, Tane, which is make sure the retirement plan is the tool that you’re using for determining whether or not this type of a transaction would fit appropriately into what it is you’re trying to accomplish, because there is no such thing in my mind as a bad financial product or financial tool. I think they can all serve a purpose. It really depends on what’s the purpose. What are we trying to accomplish?
Tane, now you I know tend to work not just Reverse Mortgages, HECM mortgages used to be thought of as a financial tool that was really only used for people who were completely impoverished and had run out of options, but we’re really seeing the tide shift on that. Now I know you work with a lot of high net worth people, so maybe take us through a quick scenario where you’ve talked to people that higher net worth that are considering these types of mortgages and why they’re considering those.
Tane: Mm-hmm. (affirmative) Yes, I can think of most recent transaction where I helped a couple that was doing exactly that. They’re downsizing or rightsizing their home. They had a very large home that they didn’t sell but were planning on selling. They found a house, purchased that home for about $500,000 and when they purchased the home for $500,000 for round figures, they came up with about $250,000 in cash to accomplish that.
This couple has low seven figure liquidity and so they could easily pay cash for that house but when they considered … and their real estate agent actually gave them a copy of my book. They read it and they’re very intelligent people and they analyzed everything and they decided for them, it makes more sense to not have $500,000 in cash stored up in the walls, foundation, and roofing shingles of their home, rather have $250,000 and keep the rest of that cash working for them in various investments.
For them, it made a lot of sense and there’s story after story and there is a trend, I’m finding of folks that have a higher net worth that could pay all cash but just decide not to. They decide to keep the money that they spent their whole lifetime essentially saving. That is definitely the trend.
Jason: Let’s talk about the downside associated because I know that Reverse Mortgages or HECM mortgages today are a lot different than they were 15 years ago. One of the concerns people have, of course, is you have a loan that’s essentially growing. You pay, you take out a loan for in this case $250,000 like you talking about, you don’t have to make any payments on that house, right.
That essentially what happens is you get to live in the house, mortgage free. You’re not making a mortgage payment but then the loan is going to be growing by whatever the interest rate is. Let’s say that one person dies and the surviving spouse still own the house. Does the surviving spouse get kicked out of the house under the terms of the mortgages today?
Tane: No, that has been changed. Let me back up a little bit. There was a challenge here and some class action lawsuits against FHA because what was happening is that there was a younger spouse and the minimum age to qualify for one of these is 62. The younger spouse if they were not 62, would not be on the loan and if that older spouse passed away, in that case, prior to a couple of years ago in the rule change, that younger spouse whose not on loan would be forced to sell that home or pay off that mortgage balance.
That has been remedied through new rules so that younger spouse would not, would not be forced out of the home or forced to pay off that mortgage balance. If both are 62 and one of the spouses passes away, the loan is not due and payable until the last borrower moves out of the home permanently. Permanently can be defined a couple of different ways but if someone moves out of the home because they need to go to assisted living and that’s a permanent situation then that loan would need to be paid through, typically, through the sale of the home.
Jason: What happens at that point if the house can’t be sold?
Tane: Usually homes can’t be sold because the prices are too high. Essentially that home would be sold at a lower price and if it can’t sell then the lender would take that over and do whatever they could to sell it through reduced price.
With the situation with these loans, I think whenever we say the words Reverse Mortgage, I find people shudder and they don’t … and shut down and don’t want to have a conversation about how these loans work but I think the fear and concern around them if people will lose their home, the lender’s going to come take my house from me and they don’t own the home. The reality is they own the home they own and are entitled to any equity that’s in it, but the benefit is if this loan exceeds ever the market value of the home, it’s not like your typical short sale where that person would have liability and have to pay for that difference.
Meaning the difference in interest that they would owe compared to the market value of the home, the FHA insurance on these loans would cover any shortfall in interest. If that house was sold at a deep discount, and it was less than what was owed on that mortgage balance, the FHA insurance would cover that.
Jason: Boy, I think that’s a really important thing for people to know is that there is insurance on these loans. In the event that that home is ever worth less than what it can be sold for, the person that took the loan out, isn’t responsible for paying it back, the adult children aren’t responsible for paying it back. It’s the insurance that had to be purchased at the time of the loan that picks up the shortfall. Did I say that correctly?
Tane: Yes, absolutely. Yes.
Jason: Can you give some examples of some of the pitfalls associated with HECMs?
Tane: Yeah, I think some of the pitfalls would be … and you addressed this earlier is if someone were to get this type of loan on their home and it was one of those types of properties that they wanted to keep in the family … Speaking to a woman the other day in South Carolina and she really wanted to do this.
I kept asking her and her son was interested in talking with me which I did have a conversation with him and I asked her, “Is this a home that you want to leave to your son?” She said, “Yes, I want to leave the equity. It’s all I have but I really would like to do a few things in the kitchen, [inaudible 00:14:29] new countertops.”
The reality in the situation is this is not the type of loan to get to just spend $5,000 on a kitchen remodel and especially if someone like her wants to leave the home to her son as an inheritance. That was really important to her. That was definitely a pitfall and so she’s not going to do a loan and I highly recommended she didn’t based on what her desires were.
I think other pitfalls would be just that if we had someone that … and we’ve seen situations where we have couples that aren’t married and they don’t get on the loan together but they cohabitate, that can be a situation where if that older spouse or older … Not spouse but older significant other passes away, that the person that they were living with could lose the home. That could be a challenge.
I think just if someone looks at one of these loans and thinks, “Oh, I’m not going to have to upkeep the property in good condition or I’m not going to have to pay my tax insurance,” or they delay in paying their tax insurance, that can be a big problem. They could lose their home to a closure because of taxes not being paid.
Those are things to consider which would be any … In that situation in any type of home. If you owned it, you have to make your property tax payments and home owner’s insurance to keep that thing going but if they don’t, that can be … They can be forced into foreclosure in that scenario.
Jason: Okay, Tane, are all Reverse Mortgages or HECM loans under the FHA now or are there still some that are private that are not government regulated?
Tane: There are loans that are starting to come up now since the comeback in the mortgage industry and secondary markets for mortgages. The private market is starting to develop programs and I say starting because there are a few companies out there that are offering what we consider larger loan amounts or what they call [inaudible 00:16:50] Reverse Mortgages.
Those are available but they really don’t compete honestly with the FHA insured loan, because they’re higher rates and higher risk for the borrower. They’re still not, in my opinion, they’re not ready yet to compete with FHA.
That’s really, and I tell people, that’s really only program that I would consider offering and that they should consider accepting would be the FHA insured program.
Jason: Tane, one of the things I love about the work that you do is that you are one of the top HECM purchase experts in the country for people looking to purchase a HECM. You’ve written a book on the subject but also you’re licensed to be able to offer other types of mortgages. You can sit down with people and truly go through a comprehensive approach to looking at a re-finance of an existing mortgage, maybe a cash out of an existing mortgage or even the HECM type of Reverse Mortgage that you specialize in.
I really appreciate that about your expertise. I’m sure some of our listeners are going to want to learn more about the work you’re doing. There used to be a time when you would give people a copy of your book complimentary. Is that still an option or …
Tane: Yes, absolutely. I think maybe the best way to do that would just be to call my office and then request that book and just mention your radio show. That would be perfect.
Jason: Okay, what’s the phone number where people can reach you?
Tane: Sure, the phone number is 800-490-4287.
Jason: 4287, 1-800-490-42 …
Jason: 87, okay, and where do they find you online, Tane?
Tane: They can go to ChurchillMortage.com/tanecabe and they’ll just see my company website there in Church Hill. If you’d like, I can spell that out. It’s C-H-U-R-C-H-I-L-L-M-O-R-T-A-G-E.com/tanecabe and that’s T-A-N-E-C-A-B-E.
Jason: Yeah, that is a unique name. You’re the only guy I’ve ever come across that has the name Tane, T-A-N-E.
Tane: Yeah, creative parents.
Jason: One of the things we hear about are fees and costs. Can you help shed a light on this area for our listeners, help them understand what kind of out of pocket expenses they’re looking at, as well as, any types of fees that are maybe rolled back into the loan as a result of going through one of these programs?
Tane: Sure, sure. The closing costs are pretty standard and typical. In fact, because it’s an FHA, there are certain restrictions around what a lender can charge. There are actually going to be less than a conventional loan when compared directly with a conventional loan. That’s closing costs which would be things like title insurance, escrow fees, recording fees, credit reports, that kind of thing.
Then there’s mortgage insurance and that mortgage insurance premium is dependent on the size of the loan that’s obtained upfront. On a purchase, what we have is we’re maximizing the loan and so if we . maximize the loan, the mortgage insurance up front is two and a half percent of the purchase price, okay. Now if it’s a refinance or they don’t have much of a loan balance on their current home, then the mortgage insurance is going to be one and a quarter percent of the appraised value.
The two and a half percent on a purchase price, can be several thousand dollars so it does get people’s attention, no question but that …
Jason: That’s the insurance, that’s the insurance that the FHA requires to protect …
Jason: Makes it so that their kids aren’t responsible for having to come up with cash at the end of that period.
Tane: Right, exactly, and so it’s important to understand why that insurance is there and why you’re paying for it. If we saw another Black Swan event in the real estate market, and home values drop significantly and that mortgage balance were to exceed that market value then an FHA insurance is going to cover that and it’s good to understand that and why they’re paying for that.
That can be the big thing but what I do is I put together a no payment home loan report and the report shows comparisons of different programs on the HECM loan and what they’re paying exactly, how much in mortgage insurance, closing cost, and loan fees if any. Typically when someone does a loan with us, there’s no loan origination fees charged but in terms of … You asked the question, what’s paid up front.
What’s paid up front are two things. Now these loans require FHA counseling, Home Equity Conversion Mortgage, aka Reverse Mortgage Counseling and that’s done typically over the phone. It can be done in person but it’s rare. [inaudible 00:22:15] offers that and these counseling agencies are approved by FHA, so they’re not part of our company Church Hill Mortgage and they’re not part of FHA but they’ve been approved by FHA to offer counseling.
The counseling is really just going through their options, going through alternatives into a Home Equity Conversion Mortgage. Once they complete that counseling, they get a certificate and then the application can be taken and we can move forward with the process. The counseling is about a $100 to $200 depending on who they go through and that is paid directly to the counseling agency and that needs to be paid up front.
The other thing that’s paid up front is the appraisal and that goes directly to pay to the appraisal management company, to pay that appraiser. That’s also paid up front. Those two things typically are going to run somewhere between six and $800, depending on location, where they’re located in the country.
Jason: That’s out of pocket. That’s what they have to come up with cash in order to make this thing happen. A lot of these other expenses you’re talking about, those are fees that are rolled back into the loan but I think the important thing …
Jason: The important thing for people to understand is then they’re living in this house, even though there’s a mortgage on it, they don’t have any payment they have to make other than they still have to pay taxes and insurance but they don’t have a mortgage payment that they have to make.
Tane: Right, right. I think it’s important to understand the math behind this and it’s hard to show a graph on radio. You can’t, right, so can’t pass a …
Jason: Tane, unfortunately, we’re going to have to … When we come back for our next episode, because we’re going to do a couple of these, where we’re going to educate people about the reverse mortgage and HECM Mortgage but we’re out of time for today.
Jason: Thank you for being a guest on Sound Retirement Radio.
Tane: Yeah, yeah. Absolutely, you’re welcome. Thank you.
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Bio: Hi my name is Tane Cabe. I specialize in helping leading edge baby boomers and seniors’ right size their home by creating a tailored plan to maximize cash flow and liquidity.
If you want to purchase a home and have no monthly payment without paying all cash – I can help you. If you want to reduce your monthly payment or eliminate it all together – I can help you. If you want more liquid cash to enhance your retirement lifestyle – I can help you. If you want to purchase a second home and become a “snow bird” – I can help you. Whatever your goals and retirement lifestyle dream is related to real estate – I can help you.
I have been in the mortgage and finance business since 1993. Along the way I have developed and sold multiple companies. I have taught, coached, instructed, and served as a speaker for various financial and mortgage industry panels.
For the last eight years I’ve invested countless hours into studying the challenges of leading edge baby boomers and seniors, looking specifically at how they plan for retirement. I’ve worked with many retirees through my own practice. I have written a book titled Double Your Retirement Dollars, Little Known Strategies to Quickly Increase Income, Assets and Cash for Today’s Retiree.
I manage a branch for Churchill Mortgage in Gig Harbor Washington. I not only serve the community I live in but eight other states. I reside in Gig Harbor with my wife Angie. We have two daughters, Lauren 21 and Morgan 23.
If you would like a free copy of my book simply call my office or email me directly: firstname.lastname@example.org
253-853-5805 or toll free 800-490-4287
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