In today’s podcast, I interview Tane Cabe about reverse mortgages. Alongside a general overview of what they are, we discuss how reverse mortgages can increase cash flow in retirement, their use for home purchases, associated taxes and fees, their role in long-term care planning, and share compelling stories illustrating their practical applications.
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Articles, Links & Resources:
Poem: Foot Prints In The Sand
Tane Cabe
Phone: 253-224-9109
Book: How To Use Reverse Mortgages To Secure Your Retirement by Wade Pfau Ph.D., CFA
Transcript:
431 Exploring Reverse Mortgages- Pros, Cons, and Real-World Insights
Announcer: [00:00:00] 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. And now, here is your host, Jason Parker.
Jason Parker: America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning in to episode number 431. We’re going to be talking about reverse mortgages. What are they? How do they work? All of this good stuff how people are using them in their retirement cashflow planning. But before we do, I want to start out by renewing our mind.
And I’ve got a verse here for us from Jeremiah 29, 14. I will be found by you declares the Lord, and we’ll bring you back from captivity. I will gather you from all the nations and places where I have banished you. Declares the Lord, and will bring you back to the place from which [00:01:00] I carried you into exile.
That last part of the verse, and bring you back to the place from which I carried you into exile. When I heard that, it just reminded me of that poem, Footprints in the Sand. And if you haven’t read that poem, I’ll include a link in the show notes just to give you some context of what we’re talking about here.
Now, something fun for the grandkids. Where did the baby shark go to summer camp? Finland. What do you call summer in Washington state? Wednesday. In today’s podcast, I interview Tane Cabe regarding reverse mortgages. In addition to doing a general overview of what they are, we discuss how reverse mortgages can be used to increase cashflow in retirement, how people can use reverse mortgages to purchase a home in retirement.
We talk about taxes and fees associated with these mortgages, how some people are planning to use reverse mortgages to help with the cost associated with long term care planning. And we share several stories that illustrate how people are using reverse mortgages. Let me tell you a little bit more [00:02:00] about my guest.
Tane Cabe specializes in teaching pre and current retirees, real estate professionals, and builders how to leverage the home equity conversion mortgage for a better retirement. Tane has been in the mortgage and finance business since 1993. Along the way, he has built and sold multiple companies. He has taught, coached, instructed, and served as a speaker on various financial and mortgage industry panels.
For the last 29 years, he’s invested countless hours into studying the challenges of leading edge baby boomers and seniors, looking at how they plan for retirement, specifically around home equity. He’s the author of Double Your Retirement Dollars. Little known strategies to quickly increase income assets and cash for today’s retiree.
Currently, he serves as a reverse mortgage specialist at C2 Financial. He resides in Gig Harbor, Washington, and he’s been married to his wife, Angie, for 34 years. They have two grown daughters, Lauren, 29, and Morgan, 31. And I’ll include a link to his contact information in the show [00:03:00] notes in case you’re wanting more information.
Just visit soundretirementplanning. com, click on episode number 431 for articles, links, and resources mentioned in today’s show. And without any further ado, here is my interview with Tane Cabe. It’s my good fortune to bring Tane Cabe back to the show. Tane, welcome to Sound Retirement Radio.
Tane Cabe: Thank you, Jason.
Great to be here again.
Jason Parker: I am so excited to have this conversation. There’s so much equity trapped in people’s homes. It’s the biggest asset that most people have. And your specialty, your area of expertise is helping people navigate what are their options. Do, if they need to access that equity, do they take a traditional line of credit against it?
Do they use something like a reverse mortgage? Do they sell the house? So I’m just excited to get into this conversation. Thanks for being a guest.
Tane Cabe: Yeah. Absolutely. I’m excited as well.
Jason Parker: You have specialized in reverse mortgage for a number of years, and I was hoping we could start out, just give us a big picture overview.
What are they? How do they work? Why should people be interested in them?
Tane Cabe: [00:04:00] Sure. A reverse mortgage allows someone to tap into an asset. Like you said, most of the time it’s their largest asset. And Yeah. Absolutely. In fact, I think the latest count is over 13 trillion that seniors hold in home equity.
I think at last count, BlackRock has about 10 trillion under management, biggest asset manager in the world. So when you consider that, as a financial planning tool, most, and this is your, I don’t want to, step on your toes, but your world is you know What kind of income do you have for retirement?
And then what is your nest egg your qualified funds your non qualified funds? And those are things you look at but you don’t we don’t look at you know the third option which is that home equity bucket and it’s a huge number and so A reverse mortgage allows you to release That equity, that idle equity, that’s not really doing anything for you to access it in a number of different forms, which we can get into in a while here, but it allows you to access that money.
And because they’re loan proceeds, they’re tax free and You know again [00:05:00] in terms of financial planning tax free is much better than taxable in most cases. It’s like converting your equity to what would be akin to a roth ira essentially, and accessing that equity tax free So yeah, that’s in how they work essentially is, you know Anyone that’s over 62 years of age or 55 plus depending on the type of program the fha government insured product is the 62 and over is the minimum age there. It allows them to access that equity by getting a portion of that through a traditional, what we, like a traditional mortgage, but there’s no payments required. And and accessing those funds, like I said, can be done in numerous different ways.
Jason Parker: Okay. And we’ve seen it, Tane, I’ve seen this play out for people in a lot of different walks of life.
And we’ll get into some of those details here where, you know, people, I’ve seen wealthy people using reverse mortgages to purchase their retirement home. Okay. I’ve also seen people where, they don’t want to move out of their house and they’ll end up using a reverse mortgage to increase cashflow.
So we’re going to cover all of these different scenarios. And [00:06:00] if you have any stories, maybe that you can pepper in there in terms of areas where you’ve seen it really help people, that’d be great. But the next question I have for you is this one about increasing cashflow. So I know traditionally this is the way that people have thought about reverse mortgages.
It’s like they use up all of their assets and then they have their, the equity in their home and they can either sell their house at that point or they can use a reverse mortgage to access the equity. So tell us about. or I guess they could also take out a traditional, maybe like a home equity line of credit, but now they’ve got a payment that they have to make.
So tell us about reversing or using a reverse mortgage for cashflow.
Tane Cabe: Sure. So one of the methods of ways to get to the equity through reverse mortgage is by having a line of credit similar to a home equity loan or home equity line of credit, but this one does not. have an employment cost, right?
You don’t have to make a payment on it, like you mentioned. So with there’s a huge benefit to that, especially in retirement, if you’re on a fixed income or you want [00:07:00] to preserve as many assets as possible because all of us are, living longer, at least that seems to be the case. That is accessing that equity through the form of a line of credit is one option.
The other benefit to that particular setup compared to a home equity line of credit you get at your bank is it has what’s called a growth rate associated with it. So each year on an annual basis, you’re going to have roughly. Right now about seven and a half to eight percent growth rate on whatever has not been tapped into.
So if you had a hundred thousand dollar line of credit and that eight percent growth rate, if you just left it there next year, you’d have 108, 000. Now this isn’t to be confused with a rate of return or like you would have on an investment or a CD. But rather, just access to more credit because you’re a year older and that’s just the way the program is set up.
And the third thing that’s really important here is this can never be [00:08:00] canceled. If you were, if any of your listeners were, you know, through the financial crisis, had a line of credit through any one of the money center banks, the big banks, right? Most of those banks, because of home values they got scared and they shut everybody off.
They closed those. Home equity lines of credit when people needed them most, right? And so with this product, it can never be canceled. No matter what happens in the economy or the housing market. In fact, you could have a line of credit theoretically available, cash available, greater than the home value.
Jason Parker: Okay. It’s
Tane Cabe: Crazy. It is
Jason Parker: Crazy. Yeah. So there’s a couple of things I wanted to, I want to circle back around to one is that line of credit that’s growing. So if you were just doing planning, you wanted to open up a line of credit, a home equity line of credit, but using a reverse mortgage, not a traditional home equity line of credit.
And the reverse mortgage company 000 available to you. If you don’t use the 100, 000, then that line of [00:09:00] credit’s actually growing over time. So you have access to more money to borrow from.
Tane Cabe: Yes, that’s correct. And on a compounded basis, right? So you can set up this essentially standby buffer asset that can be used for any purpose at all.
It’s your decision. It’s your money, do what you want with it. You could, spoil the grandkids pay for their college, advance the inheritance and give with a warm hand concept, right? Or you could go. Do your tour of Europe. You’ve always wanted to do so just or, or use it to potentially, Jason, you can speak to this more eloquently than me, but this idea of sequence of returns where you have, if your investment portfolio is down for the year, then you could draw upon this line of credit thereby prolonging it and actually increasing potentially, you your investment assets by using and leveraging a reverse mortgage non accredited in that fashion.
Jason Parker: Yeah. It’s a fascinating asset to think about all the different ways that it can be used and it, but reverse mortgages do have a bad [00:10:00] reputation. So can you maybe speak to a minute or for a minute about why reverse mortgages have a bad reputation or the stigma around them?
Tane Cabe: Yeah, sure. Sure. Like anything where you hear negative or your first reaction is when you say hey I do reverse mortgages most people like oh, why would I don’t need one of those or I don’t want you know I knew someone who had one of those and they lost their home Or I don’t want to give my house to the bank.
So A lot of these misconceptions are based in some truth historically, right? but in the mid 80s ronald reagan signed these into law and that’s when The changes, the positive changes happened before. Yes, there were equity share programs and really unscrupulous lenders that would want to access or keep that house when you passed away or foreclose on you and all these nasty things.
I’ve been doing these for since 2004 and in the mortgage business since 93. And there’s been so many iterations in my time tenure here with reverse mortgages, you don’t lose your house the equity [00:11:00] is your equity you know, the bank doesn’t want your house. You still are entitled just like any other mortgage.
It just allows People to stay in their home access equity You know do fun things in retirement with that money, whatever but it’s just like any other mortgage Nobody loses their home. The only way in fact, this is actually a more secure program in terms of protecting that asset than if you had a regular mortgage if you don’t make a payment You could lose your house to foreclosure or if the balance on your mortgage there is greater than what you sell your house for, you could have a short sale and that, that liability is your liability and goes with you versus reverse mortgage.
The only way you could ever lose your home to foreclosure would be if you stop making your tax payments, your property tax payments, then there could be risk of losing your home to foreclosure. Other than that, you’re not making a payment. If the house value is less than the [00:12:00] mortgage balance, when you, or if you ever sell the home, these are FHA insured, so you’re That is not a short sale, any shortfall is covered with the mortgage insurance on these loans.
So it’s actually less risky. And it’s a non, it’s a
Jason Parker: non recourse loan, right? So they can’t if you end up with no equity or negative equity in the house, they can’t come after your kids after it’s all said and done.
Tane Cabe: Exactly. Yeah. So you’re in that, in the reverse mortgage scenario, you’re protected on the upside so that if you do sell your house, you capture all that equity or leave the, if you leave the home to your state, they captured the equity or in the flip side, right?
Your negative equity or upside down or all those bad things that you think about. The FHA insurance will cover the estate or you in terms of, a non recourse loan. There is no recourse. They’re not going to come after you for that shortfall.
Jason Parker: I’ll never forget meeting with a couple, and this was probably.
Close to 20 years ago I met them at their home and their daughter was there, older couple, [00:13:00] elderly couple, and they had run out of money. They didn’t have any money left, but they lived in a beautiful home. I remember they had little raised garden beds in the back and their house was paid for. And they were at a phase of life, though, where, they had turned off their cable TV to try to reduce expenses.
They had a car that was 25 years old that needed repairs. And they had stopped taking all of their prescription medications. They were, like, cutting them in half because they just didn’t have enough money. They didn’t want to sell the house because they loved the house. They loved the neighbors. They loved their little garden patch.
And the daughter was like, Mom, Dad, I just want you guys to be okay. And I remember in that situation, it was like, Oh, of course, this it seemed like the perfect scenario for somebody that was looking for a reverse mortgage because it gave them the ability to get their car fixed and turn the cable TV back on and take all their prescription medications and not have to move out of the house.
And the daughter was like, I don’t really care if I ever get anything from my mom and dad. I just want them to be okay at the end of their life. So that’s one scenario where I’ve seen people use a reverse [00:14:00] mortgage. Talk to me about people that still have a mortgage on their house. They haven’t paid it off yet and let’s say their house is worth 500, 000, they owe 200, 000 on it and maybe they still have 20 years remaining on that mortgage.
How would a reverse mortgage help somebody in that situation?
Tane Cabe: Sure. So that mortgage obviously has a mortgage payment associated with it that’s required. And if you don’t make that payment, then that’s goes back to that earlier example, right? So that’s an obligation that you have to pay for. And so in this scenario, a reverse mortgage could eliminate that payment.
It could, completely wipe out any principal and interest payment that you’re making. It would be as if that particular person owned their home free and clear. And so the only thing that they would be responsible for is. paying their property taxes and homeowner’s insurance. Yeah. So a reverse mortgage could be a huge advantage to eliminate that mortgage payment in there.
And depending on their age and the equity position, there could be additional funds available for [00:15:00] them again, to access through a line of credit or get a lump sum or however they want it to do that. So they, we see that. Frequently.
Jason Parker: Yeah. So they pay off the mortgage. Now they don’t have that mortgage payment anymore.
So it’s now they’re, but now they’ve got this mortgage that is no payments being made on it. So that there is the home loan is, it’s increasing over time as a result of them not making payments.
Tane Cabe: So in your example, let’s say that we paid off of a 200, 000 loan, just for easy math, that’s the loan on the reverse mortgage now.
And instead of paying interest payments of 1, 000 a month, then that 1, 000 would be added. So after month one, that 200, 000 balance would now be 201, 000. And then 202, 000. Again, this is very simplified, but that’s how it works. I have a data visualization tool that shows what that equity position over time would look like, assuming a, three to 4 percent appreciation.
And it’s really a bell curve, right? [00:16:00] So if someone’s in their mid sixties, it’s equity increases actually, even though they’re not making a payment for about the first 15 years. Then after that, it tends to taper off, but even at age 100, there’s still equity in the home. even though they never made a mortgage payment.
So it’s a pretty dramatic illustration that people can see and say, wow, oftentimes I hear, wow, that’s not what I thought this was. I thought all my equity be gone. No, there’s plenty of equity usually.
Jason Parker: So it’s possible if you needed a reverse mortgage that and you die and the kids inherit the house, that there could still be some value remaining in that house when the kids sell it, that just the mortgage has to be paid off when it gets sold.
Okay.
Tane Cabe: Exactly. And I would argue, I think a lot of people get hung up. This is my biggest objection when I talk to people and they may not verbalize this, but I know this is what they’re thinking because I’ve been doing this long enough is they get fearful of, I’m not going to have anything to leave to my children or a legacy.
And if that’s the case, if you think your home is something you want to [00:17:00] leave, that equity, then I would argue if you have other assets, like with you, for example, Jason, your clients would have a portfolio with you that you’re managing, then they could do a reverse mortgage and take pressure off of the withdrawal rate.
of that portfolio that you’re managing for them. And in all things being equal, there could likely be more assets or a larger legacy to leave to the estate versus just trying to focus on that home equity as leaving that to them, if that makes sense.
Jason Parker: As you think about reverse mortgages, what are the risks associated with them?
Tane Cabe: I think the biggest risk is like any other debt obligation is you’re obligated, right? In this case, you’re not obligated to make a payment, but if you don’t make property tax payments and keep the home, up, then you could lose it to foreclosure. So there is a risk there. There’s also a risk in that.
If someone absolutely wants to have their home paid off free and clear, which [00:18:00] again is something that we have been all taught, right? To burn the mortgage and own the home free and clear so that we can die with the most equity? I don’t know. I, or so that we can leave that house to our kids that are, they’re going to sell it anyway.
So I think the risks are pretty limited. In fact, I think it’s personally, you know, this is what I do for a living, but I think it’s more risky to not have one than to have one to not, to not have a reverse mortgage then to, to not to maybe have a traditional mortgage or have your house paid off free and clear.
But that being said. Like anything else, there is a risk with having a, an obligation to, a loan on your house. There’s also a risk and opportunity cost risk, of, of that equity sitting idle and not doing anything. And if the house drops 50%. Which we’ve seen then that could, if you had a reverse mortgage pulled out on it and had today’s values versus maybe 2030s values or, who knows what’s going to happen with the housing market, right?
Lock in those gains and have [00:19:00] that set up. So I, I don’t think personally that’s where I don’t think there’s a huge amount of risk other than if you don’t pay property taxes and if your goal is to die with the most equity then this probably wouldn’t be a loan for you.
Jason Parker: Yeah or if you have a family estate and this family has been in a house for generations and it’s really important that the kids, this is a house that they want to keep in the family.
They don’t plan on selling it at a future point. What happens in that scenario, Tane? So let’s say somebody has this family house. That’s been in the house in the family for generations and, They’re hoping it’s going to go to their kids, but they take a reverse mortgage on it. So now, let’s say they have that 200, 000 reverse mortgage on this house.
The parents die. The kids are now responsible for figuring out how to pay that 200, 000 mortgage off. What are their options at that point?
Tane Cabe: Yeah. So if they want to keep the house, their options are to get a traditional mortgage to pay off that loan. These loans are doing payable when the last person moves out of the home permanently, there’s no timeframe on it.
[00:20:00] It could go out as long as that person. lives in the home. What would need to happen is they would need to pay off that house loan, the reverse mortgage balance with a traditional mortgage or, cash. If someone is setting up a reverse mortgage on a home that they, let’s say it’s a, whatever, beautiful waterfront home here, we’re in the Puget Sound and they want to keep that in the family in perpetuity, then getting a reverse mortgage on that, it does carry more risk, right?
Because then what if the heirs? Can’t pay off that reverse mortgage and they’re forced to sell the house to pay off that reverse mortgage. So other considerations need to You know be made for what to do in the case of them doing a reverse mortgage and you may want to look at Life insurance policies or something to be able to pay off that mortgage in the event that they want to keep that house So yeah, I don’t recommend if somebody’s really adamant about wanting to keep this house.
I don’t recommend that they You do a reverse mortgage in that scenario, unless they have other assets and they’re pretty [00:21:00] confident that they’re going to be able to pay off that mortgage in another way. From other assets versus having to sell the house.
Jason Parker: So in this example mom and dad, they have the house.
It’s valued at 500, 000. They take the 200, 000 reverse mortgage. Parents die kids. Now, do they have to buy the value of the house? Do they have to get a loan for 500, 000 to buy the house from the bank? Or do they get to just pay off the loan? That’s outstanding.
Tane Cabe: Yeah, they just pay off the loan.
That’s outstanding.
Jason Parker: They don’t have to buy it at fair market value. The bank’s not going to say, what’s our house now, buy it from us for 500, 000. They just say we just want our money. And how much time do the kids have to come up with that financing?
Tane Cabe: Yeah, they have up to six months. If what’s going to happen is the servicer will contact the estate, the whoever the executor is, and they’ll find out.
What are your plans with the house? Are you going to sell it or do you want to pay off this mortgage? If they want to pay off the mortgage, then there’s certain timeframes in order to do that. They don’t get as much time versus selling a home. They have up to six months and they can ask for an extension beyond that if the house has not sold.
And that extension [00:22:00] can be three month increments. So up to 12 months potentially. To sell the house and usually homes don’t sell because they’re overpriced, right? So you might have to drop the price. But yes that’s basically how it would work.
Jason Parker: And I I remember at one time now, I feel like I I have seen some, maybe legislation that changed this and you can help me understand, but at one time when one person was old enough to qualify for a reverse mortgage and the spouse was not old enough.
So let’s say you had a guy that was 70 and a wife that was 55 and the husband died. The wife wasn’t on the reverse mortgage, so she wasn’t able to stay in the home. Is that still the case? If there’s a big discrepancy in age, do both people have to qualify for the mortgage or what happens in that scenario?
Tane Cabe: Yes, that’s been one of the positive changes, right? We went through this a few years back where if there was a married couple and say the husband was older. over 62 and the spouse was not the wife was not 62 and they did a reverse mortgage and husband passed away then in the case [00:23:00] of the younger spouse they would have to do something with the house and pay off that mortgage now that’s all been rectified.
You can get one of these loans, we call it a non borrowing spouse. If we have someone that’s over 62 and someone that’s under 62 I know you have listeners all over the country, maybe even the world. So if there’s anybody from Texas that doesn’t apply, both people have to be 62 or older. So yes, there’s provisions built in for that now and protections for that surviving spouse that may be under age.
Jason Parker: Okay. Good. Let’s transition to talking about, and this is where I’ve seen wealthy people use reverse mortgages. It’s to purchase a home. They use a home equity conversion mortgage for the purchase. Can you talk to us about that?
Tane Cabe: Yeah, sure. So the best way to structure the purchase of a home from the standpoint of taxes and from the standpoint of leveraging your assets and keeping the most money invested to prolong those assets would [00:24:00] be using a reverse mortgage to purchase a house.
So there’s traditionally two ways to purchase a house in retirement or otherwise. One would be to get a traditional mortgage, but where you’re having to make mortgage payments. The other would be paying cash. And so most retirees are looking, okay, we’re going to sell our house. Maybe we need to grab some additional assets from Jason or a financial advisor.
and use all cash to purchase that next home so that we don’t have a mortgage payment. Most people don’t want a mortgage payment in retirement. The third option now is for them to be able to purchase a home with a one time down payment using a reverse mortgage. Now we’ve maximized the reverse mortgage in that purchase, so there’s no additional funds available.
But what it allows someone to do, in your example, buy a house for 500, 000 and put down 300, 000. and get a reverse mortgage for 200 and not have to make payments. So you’re basically able to purchase a home with a discount. Theoretically, it feels feels like that. So what we have is a lot of clients will sell their home that they have a tremendous amount of equity in.
And [00:25:00] instead of paying all cash for the house use a portion of that equity and purchase the house using a reverse mortgage. Thereby, you’re able Releasing more equity from the previous home to invest or put into a retirement account for or future needs. Yeah, it’s a great opportunity. I think more and more people, whenever I speak to people and show them how this works, they’re like, Tane, why isn’t everybody doing this?
And and I hear that more often than not. And it does make a lot of sense for people who want to purchase them. I have a lady, she’s not. She’s not wealthy by any means, but she’s in fact, her social security income is under a thousand dollars a month. And that’s all she has. But she has an 800, 000 home that she owns free and clear, and she’s going to sell it.
And she’s going to buy a home around 650, 000 and she’ll have 250, 000 to 350, 000 depending on what she sells her home for in additional cash now that she can have as a side fund to help her supplement her retirement income and [00:26:00] have no mortgage payment. So, both for people who have means and those that don’t, it can be a great option.
Jason Parker: Yeah. Yeah. If if you’re not concerned with consuming everything that you have, the reverse mortgage seems it seems like a tool where if you said, look we already helped our kids, we put them through college, we bought them cars, we’ve taken care of them. We just don’t ever want to be a burden to them physically or financially.
And if there’s anything left, that’s great. But ultimately we’re just trying to use everything we’ve got. It seems like a way to optimize the use of your assets. Oh, on the home equity conversion mortgage for purchase, does it have to be your primary residence or can it be a secondary home?
Tane Cabe: Yes. Good question.
It does have to be your primary residence. We do have people though, that do this strategy and purchase a second home using the remaining cash or get a traditional mortgage with a down payment from some of the remaining cash. And so it allows them as a lot of retirees, depending on where you live in the country, you want to be in a warmer climate in the winter time.
Where we’re at [00:27:00] Jason, Northwest here, people escape to California, they escape to Arizona in the wintertime, and so it allows for some more flexibility. But the home that you have the reverse mortgage on does need to be your primary residence that you occupy in that state and you are a resident of that state.
Jason Parker: And for a certain number of months every year?
Tane Cabe: Yeah, theoretically six months in a day. So the, there’ll be an annual survey that goes out to ask the. The homeowner what time frame they stayed in that home, if it could be every other month, but up to, it has to be six months in a day, essentially.
Jason Parker: We talked about having a line of credit available to you that you could draw from to access funds to help supplement your lifestyle and retirement. And then you also mentioned a lump sum. Are there restrictions on how that money can be used? If you’re using a reverse mortgage, so you, let’s say you take a 200, 000 lump sum out and what can you use that money for or what kind of restrictions are in place on how you can use the reverse mortgage [00:28:00] proceeds?
Tane Cabe: You can use them for anything you want. What we don’t want to have happen is they pull. 200, 000 out and go buy, name your favorite investment, and put it in the market. So we’re going to have several disclosures that cautions and they agree upon the fact that they’re not using home equity to invest.
Now that’s different if they sold their home and they captured that equity and then used a portion of that equity to purchase a home using reverse mortgage. And then they’re used another portion of that equity to put into. name your favorite ETF asset investment, whatever, not a problem. But other than that, there are no restrictions.
Jason Parker: So they’re not going to want, they don’t want to see you take a reverse mortgage out to go buy a rental property.
Tane Cabe: No, you could certainly could do that. You certainly could do that. But you could speak to the, the financial regulations and rules much better than I can. We don’t want to use home equity through the, through a refinance or a [00:29:00] reverse mortgage, however, they access that equity invested in the market But there are no restrictions in using that equity to go purchase a rental home
Jason Parker: In
Tane Cabe: fact, we’ve had people Use it to add an adu in their backyard, right?
Which is you know, a lot of the municipalities are really encouraging that now for housing density and you know What a great way for a retiree to supplement their income and rent that ADU out.
Jason Parker: Or move into the ADU and rent out the primary residence. Yeah,
Tane Cabe: exactly. You took the words out of my mouth, right?
Age and place in the current home. And then if you decide maybe we need an in home caregiver, we’ll have that person live in the ADU, or we’ll flip flop, right? Maybe we’ll rent the, we’ll rent the main home out and live in the ADU. So there’s so many more options but certainly using a reverse mortgage to do that kind of a strategy.
Can be can be employed and be, encouraged for people to look at.
Jason Parker: Earlier you mentioned that a reverse mortgage is a loan, so it’s not taxable income. So when you start drawing on that home equity line of credit or if [00:30:00] you take a lump sum out, it’s a way to access money and there’s no, immediate tax implications.
There’s no, nothing that gets reported on your tax return for having access to those funds.
Tane Cabe: That’s correct. You bring up something that triggered in me when we’re talking about the purchase, the, with the new tax laws, this concept are called acquisition indebtedness. So say for example, someone does decide to pay cash for that house and then comes back later and gets a reverse mortgage or, a traditional mortgage.
to remodel or do whatever they want, right? Cash out, refinance. That interest is likely not tax deductible because they didn’t acquire the property. This, what’s called the acquisition indebtedness piece. So with a reverse mortgage you’re, you have that acquisition indebtedness piece and you can write that interest off on a reverse mortgage if you decide to make a payment.
So those are some things to consider too, for people who have tax problems or want to access itemized their return and take [00:31:00] that deduction for interest. They certainly can do that with a reverse as well.
Jason Parker: So people could have a reverse mortgage and instead of letting the balance on the loan grow, they could make a payment for the interest if they just wanted to try to maintain it.
Tane Cabe: Yes. Yes, exactly. I have a client right now, they’re selling their house in Gate Harbor for a million and they’re going to buy a house for a million up north and they were considering a traditional mortgage, but think they’re going to do a reverse and make payments on it and maybe they’ll make half a payment or maybe they’ll make a full payment.
They can do whatever they want. They can pick whatever payment they want and they get a monthly statement and it shows exactly where their balance stands. Are
Jason Parker: there any other tax benefits associated with a reverse mortgage?
Tane Cabe: There are some more advanced strategies. Let’s say for example, you have a client that’s got a lot of qualified funds and they want to convert some of that, qualified IRA money to a Roth.
Obviously there’s going to be a tax hit for that. And so one of the ways to [00:32:00] potentially absorb that tax would be to do a reverse mortgage and use some of those funds to cover that tax. There’s definitely some Advanced moves that you can make with these in order to convert some of those qualified funds into Roth, if that’s something that someone wanted to do.
And, obviously it’s a case by case basis and would require an analysis to determine whether that’s beneficial for a client or not, but yeah.
Jason Parker: What about fees? I, one of the, one of the negatives I’ve heard associated with reverse mortgages is that they are very high fees. Can you speak to the fees associated with reverse mortgages?
Tane Cabe: Sure. Yeah. The fees are no greater than and sometimes lower than a traditional refinance. With the exception of the insurance. So when we talk about fees, I talk, I think about closing costs, right? Like an appraisal and title insurance and escrow fees and recording fees, credit report fees, those types of things are all items that need to be paid for a traditional re, re, a refinance or a purchase loan, conventional loan, as well as a reverse mortgage.
[00:33:00] The difference here is now there’s an additional cost associated with the reverse mortgage, and that’s the insurance. The mortgage insurance is two percent of whatever the home value is or the purchase price, if it’s a purchase, and obviously that can be a fairly large number. But what that’s there for is to protect the both the borrower and the lender in case that value is lower than the mortgage balance when this all gets settled up at the end, right?
So if the balance is greater that insurance is going to protect the lender and it’s going to protect the borrower so that there’s a non recourse event. In that case. And there’s really nowhere else you can get this type of product, right? And not have to make a mortgage payment ever and have that guarantee that you will never own more on the house than what you can sell it for.
And that’s, there’s a cost to that, right? That goes into an insurance pool an FHA insurance pool. And that is paid out when those occurrences happen. Yeah.
Jason Parker: So if you take out, if you take out a line of credit and you’re not using it, but you’re just having it, there’s this buffer [00:34:00] asset. You’ve got this.
insurance costs that’s going to hit every year that’s going to be added to the loan. So you would have to pay that insurance cost every year if you didn’t want the loan balance growing.
Tane Cabe: So there’s an initial upfront mortgage insurance, which is 2%. And then there’s a annual mortgage insurance premium that’s added to the loan balance.
And that is one half of 1%. So it’s fairly negligible. But it is a cost there. And if you want to keep that balance from going up, then you would need to pay that out of pocket. I just had a client that closed, he had a two and a half million dollar house rent clear. He wanted to set up a a standby buffer asset line of credit.
So he did do that. And for him, I think he accessed he’ll have access to about 400, 000 in a line of credit. But it’s just sitting there not being tapped into yet. But there are, for him to set that up, it was about 24, 000, give or take. And
Jason Parker: that’s a one time upfront fee and then a small half a percent fee per year [00:35:00] on top of that.
Okay. Okay.
Tane Cabe: Which, he didn’t pay out of pocket for that. He just started, he paid that through the loan. So the loan balance started at that level and then would be accumulating interest, small amounts, but still accumulating interest on that.
Yeah. But for him, the planning, it made total sense.
And for a lot of people, it does for planning purposes, he’s, he had plenty of assets in addition to what, in addition to his home, but he just knew he wanted to access this tax free at some point, maybe in the future. And a lot of times that those decisions are made around what ifs, right?
The, what if we need long term care? What if I need someone to come in and help, this guy’s in his low 80s and he’s still very active and gardening and doing all kinds of stuff. But at some point, maybe he or his wife may need long term care. And so that’s a consideration in using this line of credit for that kind of need potentially.
Jason Parker: Interest rates. So we’re in this interest rate environment where we, mortgages are seven, sometimes 8 percent on a traditional mortgage. Are interest rates high on the reverse mortgage now? And what kind of [00:36:00] impact does that have for borrowers? Does that mean they have less equity that they can access or and are those interest rates fixed or variable or either?
Tane Cabe: Yeah. So the way that this works is there are two options. There’s a fixed rate and there’s a variable rate. There’s been talk about just eliminating the fixed rate altogether. About 98 percent of People who get one of these get a variable rate because then they have the line of credit option. They have potentially lower rates historically.
If someone were to get a fixed rate, they’re looking at 7, 3 quarters to 8 percent on a variable rate. The interest rate can actually fluctuate monthly, which seems like a lot, like freq too frequent, but it’s actually not a bad option because they’re very small changes, but as rates come down, they’ll come down faster.
And that’s a whole nother podcast, probably. What are rates going to do? But those rates are in the neighborhood of seven and a quarter to seven and a half. Um, Yeah.
Jason Parker: Yeah. And we should probably let people know we’re [00:37:00] recording this at the end of June, 2024. So if somebody’s listening to this in the future, you know, great thing about the podcast is that it’s a time capsule, but so you’ve got a fixed rate or a variable rate.
And then if you were to take a fixed rate mortgage, you lose the ability to have the line of credit. Is that what I heard you say?
Tane Cabe: Yes. And you’re required to take all of the money upfront. Okay. So you get a lump sum and that’s it. Okay. There’s no access to future equity. Yeah. So there’s a lot more restrictions around that, and that’s why I think people opt for opt for the variable.
Now, you did ask one other question. Do interested impact the amount of funds that they can get through the loan? And that’s absolutely 100% yes. It’s going to be less available funds. 18 months ago, a 62 to 65-year-old could access. up to about 45 to 50 percent of their home’s value. And now it’s more like 30 percent, 35 percent.
So
Quite a bit difference there. That being said, that shouldn’t prevent people from doing anything now if they [00:38:00] were interested in doing a loan like this, because rates will come down. And at least we think they do well, hopefully. And we can streamline a refinance with these. So we monitor.
Where people are at, if rates start to drop, there’s an opportunity or, to potentially refinance and get more funds available. So that, those are some things to consider.
Jason Parker: Would a refinance be necessary if they had a variable rate loan to start with?
Tane Cabe: The only reason it would be necessary is if they wanted to access more funds.
So let’s say their home value stabilized, maybe it’s going up or not going down in other words, and rates came down their loan amount when they first did the loan was locked in. They’re not going to get more funds because rates are coming down. So we would act, we would want to run another appraisal.
The benefit there is there’s no mortgage insurance expense again, so the costs are much lower. But that, we would need to do a refinance to, [00:39:00] to access more funds. Okay. Based on that lower lock in rate.
Jason Parker: You mentioned long term care a minute ago. This is one of the biggest fears that people, everybody has.
To lose your cognitive ability or your physical ability and just to lose your independence. But it’s a reality. A lot of people are going to experience that kind of event. And one way that people think about paying for long term care is using reverse mortgage proceeds. How would that work?
Tane Cabe: An example I just gave where the couple. Opened up a standby line of credit that buffer asset in their case, they’re going to access a little over 400, 000. And that’s going to continue to grow. I don’t know what the 24 hour care expense is. For in home care, but I think it’s in the 10, 000 range.
You might have more information on that. So if it’s 000 a month, how long is that going to last? And if you had 400, 000 or 500, 000 in a line of credit that you could access, that might be one [00:40:00] option for people to consider. It’s always a delicate question. decision because nobody knows, right?
You just don’t know. But statistically, it’s estimated that 70 percent of the people will, that are over 65, will need some sort of long term care. And currently, 1 in 10 can afford it. So there’s going to be a convergence here, where people are going to need Long term care, but can’t afford it. I think 15 percent of the population can qualify for Medicaid, which is a certain income threshold.
You have to have a low income to qualify for that. And so there’s a lot of people that may need long term care, and their largest asset is their home. So they’re going to have to sell their home to access that money to move into assisted living, or they’re going to have to get a reverse mortgage to access that money.
To have someone help them in their long term care needs so that they can age in place. [00:41:00] So it’s going to be an interesting next few years. I think the stats. By 2030, 75 million people in our country will be over 65. And again, if 70 percent of them need long term care and one in 10 can afford it, they’re going to have to sell their home or get a reverse mortgage.
I think there’s no other option for many people. So,
Jason Parker: You’ve been doing this for a long time, so you’ve seen things go well and poorly. Do you have two stories you could share with us? One story where you’ve worked with somebody and you’ve really seen where the reverse mortgage was just a wonderful tool.
It really helped them improve their situation. And can you think of a situation or a story where after the fact people were upset or they felt like they got into something that they didn’t really understand, you have one, one of each. I’m
Tane Cabe: trying to think about anybody who’s not been happy as a result of getting a reverse mortgage.
I just, I remember [00:42:00] one phone call, I’m trying to remember the client at this point, but I remember her saying, we have, we are not happy with this. We are not happy. I kept asking why is that? And I want to say that it’s because they wanted to make a payment to keep the mortgage balance, even.
They didn’t want that mortgage balance to go up. And they are, there were a couple that moved every two or three years. And I knew that going in and I said, look, if you’re going to move in two or three years, don’t do this loan there. We talked about the costs are front loaded, right? It’s not going to be worth it for you if you’re just going to stay in your house for two or three years.
And I don’t know if they ever decided to move in three years, but they were adamant. Oh no, we want to do this. We’re probably going to stay here longer than we normally do. And we’re going to make a payment to keep that. And I do annual follow ups or clients. I just remember them saying, this was not a good thing for us.
And now that. Probably in the initially looking back was not a good fit for them, even though they wanted to do it. So [00:43:00] that would be the only thing I could think of that was a negative story. The other stories are pretty the fresh ones are a couple that sold their home and bought another house and, They had extra cash on hand and now are fixing up a new house that they, not a new house, but an older home that they bought and in one of the islands up here and, story after story.
I think of my favorite story is Jean who lost her husband. That’s not my favorite part of the story, but lost her husband and he was fairly young in his mid sixties. They had a dream retirement home that they built and she couldn’t really afford to keep it when he passed away. So she was forced to sell the house and captured about 280, 000 in equity from that sale.
She thought she was going to have to go rent a condo in Seattle. And that was the last thing she wanted to do. Her brother referred her to me and I said, we can actually look at redoing a reverse mortgage for purchase. And this is how that would work. And she was very [00:44:00] skeptical and didn’t believe me.
And But yet she was referred by her brother who she had a lot of respect for and he was in finance. And at the end of the story is she ended up buying in a 55 plus community here, bought the model home, but it was like 550, 000, put about 225, 000 down at the time, no mortgage payment. She’s been there for probably six years now, loves it, is living her best life and referred her sister who also lives out there now.
Her sister just referred a woman up in Seattle who did a reverse mortgage with me. Story after story after story positive. It just, and there’s. What I do, I get to do is amazing. It’s fun to, so when you ask me for, the good, the bad and the ugly, it’s hard to find the bad and the ugly, the good is just so far outweighs the bad.
Jason Parker: The thing, I think I’ve always appreciated about you Tane is you are Just very transparent. So when people talk to you I, when we’ve referred people to you, I feel like I’m referring them to an advisor that’s going to walk through all the pros and the cons, the good, the bad, the ugly, so that people know all of [00:45:00] that information going in.
And that I just think that when people understand it, then it is less likely to have a negative experience. But if you were giving advice to someone that’s considering a reverse mortgage as part of their retirement plan, what advice would you want to make sure that they are aware of? Or what advice would you give them?
Tane Cabe: I would just say do the research and I can provide you material for doing the research. One of the things that we do is a what we call a heckum report. And it’s a way that we visualize the data of a reverse mortgage. So much of what’s historically been available to present reverse mortgage is just like a litany of numbers on a spreadsheet and it’s not helpful for anybody.
And Understanding visually how it works. And then also just, I, they can visit my website. There’s also, whenever you start Googling things, right? You have to use your filter to understand what is real, what’s not real. My website can be a decent resource.
I wrote a book and that I make my book free [00:46:00] available electronically. If you want to print a version, I can send one of those out as well. Yeah, I think just, Get the facts and there’s people that are way smarter than me that have written books on the subject and visit their websites.
Wade Pfau, he’s potentially someone to look into. There’s all sorts of ways to add, gather information on these.
Jason Parker: Yeah. And I remember what was that book that Wade had written about reverse mortgage? Do you remember the title of it?
Tane Cabe: Yeah, it’s it’s the Retirement Researcher’s Guide series.
It’s reverse mortgages, how to use reverse mortgages to secure your retirement. And he’s the American College of Financial Services. Yeah,
Jason Parker: we’ve had him on the get, we’ve had him as a guest in the past. Yeah. What’s the name of your book?
Tane Cabe: It’s Double Your Retirement Dollars.
Jason Parker: And where do people find your website?
Tane Cabe: Just go to TaneCave. com.
Jason Parker: Awesome. And what about licensing? Do people have to, are you able to work with people around the country or are you limited to Washington or what happens there?
Tane Cabe: I’m [00:47:00] licensed in a handful of states, but any state that I’m not licensed in, I can I work for a company that we have people in every state for the most part.
So yeah, I
Jason Parker: can create a connection there. Sure. Yeah. Absolutely. And earlier you mentioned was it FHA backed mortgages? Yeah. So there are some reverse mortgages that are not backed by the government. They’re not regulated by the government or those things that people need to be concerned with or watch out for.
Tane Cabe: I don’t think you need to be concerned with those at all. They just allow for more flexibility that the FHA product doesn’t. So the age requirements can be dropped down to 55 depending on the state. These aren’t available in every single state. And, but you’re gonna pay not you’re not gonna pay for the insurance, the 2 percent upfront insurance in the annual, but you’ll be paying for it in the interest rate.
So the interest rates on those loans are, 2 plus percent higher. So 9 to 10% but again, those are designed for people who are younger and designed for people [00:48:00] who have higher price properties. So someone who might have a 2 to 10% plus million dollar home, this could be potentially a better option for them than the FHA product.
But again, it’s case by case, it depends. But I would not be afraid of looking into those if that’s your scenario.
Jason Parker: Right now, would you say that more people get the regulated, FHA government regulated mortgages, reverse mortgages, or more people go down the private reverse mortgage path?
Tane Cabe: By far the FHA product, yes is the majority of the people.
The proprietary sort of jumbo those alternative reverse mortgages are done in high priced areas, places in Hawaii and California and those kinds of higher end, higher priced states or neighborhoods.
Jason Parker: Any final thoughts, anything else you want to share with our listeners before we finish up today?
Tane Cabe: Have an open mind about reverse mortgages. Don’t don’t just dispel them and say, look, I’m not going to do a reverse mortgage. I don’t need one. It’s a tool that can be really an well used as a retirement planning tool, integrating [00:49:00] into your retirement plan with your home equity, looking at The amount of home equity that you have.
My wife and I are not age qualified yet, but when we turn 62, we’re gonna get one. Do we need one? No, we don’t. We could, we don’t have to get one financially. That’s not a need we have. However it’s tax free money that we can get our hands on and everything that I’ve tried to do is.
How can I set myself up in retirement so that any income I have the majority of it’s tax free. So that’s just another option for me to be able to access those funds.
Jason Parker: Tane, I’ve known you for a long time and it’s weird to even hear you talking about the fact that retirement could be on the horizon, but we’re not getting any younger, I’ve been doing sound retirement radio now for 15 years, which is hard to believe, but.
Tane Cabe: That’s amazing. You’re doing a great job with it. That’s yeah. Thanks. It was
Jason Parker: good to connect with you again. And I know that our listeners are going to just really value this this time and a better understanding of how the reverse mortgages work and all the fees and taxes and using them for purchase and [00:50:00] cashflow.
It’s just really a great conversation. Great to have you as a resource. We’ll be sure to include links to your website in the show notes. I encourage people to read your book, double your retirement dollars if they’re trying to navigate reverse mortgages and. Just give people a resource where they can, get some good advice.
Thank you.
Tane Cabe: No thank you. Appreciate the time.
Jason Parker: Alright, take care.
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