Have you ever heard of a reverse mortgage? Are they a good idea? How can you use them to increase your income in retirement?
Today we’ve brought on the go-to reverse mortgage broker, Mark Hammond, to teach us the do’s and don’ts with a reverse mortgage. Mark is the owner of Legend Financial Services and has been a mortgage broker in Utah for nearly 30 years, specializing in reverse mortgages. In this episode, he even teaches you how you can use your home equity to invest for passive income and NOT pay it back!
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Chris Miles Bio
Chris Miles, the “Cash Flow Expert,” is a leading authority on how to quickly free up and create cash flow for thousands of his clients, entrepreneurs, and others internationally! He’s an author, speaker, and radio host featured in US News, CNN Money, Bankrate, and Entrepreneur on Fire, and has spoken to thousands getting them fast financial results.
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How Does a Reverse Mortgage Work with Mark Hammond
Welcome to our show that’s for you and about you. Those who work so hard for your money and are now ready for your money to start working harder for you now. You want that freedom and cashflow right now. Not 3 or 4 years from now but today so you can have that financial present you planned for not just your financial future. Most importantly, it’s not about getting rich. It’s about enriching the lives of others because as you are blessed financially, you have a greater ability to create a ripple effect through the lives of those around you.
Thank you so much for being a part of this movement. Thank you for tuning in and for binging. I have heard several of you talk about how you have been binging all the way through these episodes. I appreciate you folks tuning in and being a part of this movement because we can’t do without you. Thank you so much for being a part of this.
As always, remember, you can always go visit us at MoneyRipples.com for more information. If you are looking for ways to become more financially independent or you want to be able to get that cashflow and passive income coming in now, go take our online calculator at MoneyRipples.com, find out what your passive income number is, how much you could create in the next twelve months. Be sure to do that now.
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I’m excited about this episode because this is somebody I have known for several years now. Someone that’s if it’s ever been a go-to when it comes to reverse mortgages, he’s been the guy now. He’s in Utah like I am. He’s licensed to Utah but the wealth of knowledge he has. He’s been doing this now for many years, since 1994, he’s been in this business.
Many times one of the strategies that we don’t bring up often on this show that I know can massively impact your cashflow or your passive income. Especially if you are moving into your 60s or you already are in your 60s. This could be an amazing strategy that could revolutionize everything that could be done here. Mark Hammond, welcome to our show.
Thank you so much for having me. It’s great to be here.
Give us a little bit more of your background and how you even got down this rabbit hole path because this is not the typical path. I was a mortgage broker at one point myself but Reverse Mortgage is a whole other beast. How did you end up down this path?
Back in 1994, I started with a mortgage broker that focused on more difficult to-do loans. They were called subprime loans at the time but eventually, they were. I worked at that company for about six years. I then was recruited to work for Wells Fargo to be a leader mortgage leader in the State of Utah. I opened up my own brokerage in 2003 with the aim of doing financial services as well as mortgages. I did that for about five years. Around the time, a little bit before we had the crash in 2008, I started doing reverse mortgages and those ended up being a boon for me going into that horrible mess that was the crash of 2008.
Being a mortgage broker on my own, I absorbed a couple of companies during that time that wasn’t doing so well but had a lot of personnel. Around 2008 or so, that’s when I started getting into reverse mortgages more. I have been doing those ever since and made that the prime focus of my business. It’s great to work with seniors, help them navigate retirement, and be able to maximize all the things that they can do to make their budgets look better and live their best life.
For those of us joining, especially in 2008. I can imagine, that was one of the few more strategies that people said, “Yes, give it to me now,” because they want that relief from the mortgage payments or even get more capital in their hands. For those who are reading that don’t understand what reverse mortgages are because I know there’s a lot of confusion out there. Give us a summary of what they are and how people use them.
A reverse mortgage is like a regular loan, except there are no payments required. They lend around 50% of the value. They don’t lend a whole bunch of the value. They lend about 50%. It’s a little bit higher if you are older. A little bit lower if you are younger. The minimum age is 62 but it’s based on the value of the home and the age of the youngest borrower. They lend a certain amount. If someone owes about 50% of the value of their home, then we can pay off that mortgage and they don’t have a mortgage payment anymore. It’s basically like kicking the can down the road though. They keep track of the interest and it accrues and builds up over time.
Every month they will get a statement. The mortgage balance will be a little bit higher than it was the month before. They could pay the interest if they wanted to. Most people don’t. That’s the idea of doing these. It’s taking a break from having to pay the interest and pushing it down to another time when either they are permanently moved out of the home or the last borrower has passed away.
That’s how they work. If we are able to pay the mortgage off, great. They don’t have a payment anymore. If they have a very small mortgage, we can pay off the mortgage then they have extra cash that they can access. Either as a lump sum or as a line of credit. They can even turn the money that’s in there into a stream of payments.
They could either say, “Give me $1,000 a month until the money’s gone,” or they could say, “How much would you give me for the entire time I live on the property?” There are ways of doing an annuity type of situation where they can’t outlive the money. They will get that same amount no matter how long they live there.
It’s super flexible. If they decide down in the road when they are getting that annuity. If they decide, “We need to get a new roof.” They can call the company and say, “I need $10,000 to do my roof.” They would give them the $10,000 and they would redo the stream of payments after that because they have reduced the money. It would make the stream of payments a little lower but it can change it around.
It’s very flexible is what you are saying. You can do almost anything you want. Almost within limits but to your imagination’s content.
There are no restrictions on what they can use the money for. If the money’s being used to pay off the mortgage, they are going to give them the maximum amount at closing to do that. If they are getting cash out, they do stagger out the payments of the money a little bit. Several years ago, they decided, “People are spending this money too fast. Maybe all their kids had too many business ideas and took all the money.” I think they were trying to slow that down a little bit. They will give them 60% of the money at closing and then the other 40% after one year. If they are getting all cash, they do stagger that a little bit. I don’t think it’s treating people like adults but it’s not my decision.
If we went an example here, let’s say somebody has a paid-off house. It’s a $500,000 house. What you are saying is they could get up to $250,000 cash out with no payment. Unlike getting a HELOC, you get $250,000. Might have to be broken up over two years but you might get $150,000 upfront, and $100,000 the next year. You can get that money and you use it for whatever you want, including investing to create more cashflow. Not only do you have no payment on that money but now you are earning cash on that money. Again, that’s $250,000, 10%, it means now you are making $25,000 a year off a house that you weren’t making anything off of before.
The only obligation you have with the reverse mortgage is to live there. As long as you are living there, paying the taxes and insurance, and maintaining the home, then you don’t have to pay any interest. Those are the three things that are important to do. They are a checkup on you once a year. Make sure you are living there and you have to sign something saying, “I still live here.” You have to prove that you are paid your taxes and insurance.
The only obligations you have with the reverse mortgage is to live there. As long as you're living there, paying the taxes and insurance and maintaining the home, then you don't have to pay any interest. Click To TweetThose are the touches they have during the year to make sure everything’s going okay. Other than that, the money can be used for whatever they want. I like to use an example of a person who has a $600,000 home that’s paid off and wants to downsize. They sell the home, so they have $600,000. Let’s say they want to buy a $400,000 townhome.
They could take the $400,000 that they have and pay cash for the house and then they would have no payments or they could take around $200,000. Buy a house with a reverse mortgage purchase, which you can do, a purchase with those. You put about half down, then they have used only $200,000 to buy the townhome. They have got another $400,000 in the bank and no payment. That’s a great way to maximize the cash that they have for that and have more money to live on.
That was the exact strategy my mom used in the state of Washington. The same thing. They were downsizing, moving away from Seattle more, moving out into more of the mountains, out in the woods, and they got a cheaper place. They took all the equity from the other house and put it into the next one but with the reverse mortgage, there’s no monthly payment. They are fine and they are in a better position than they were when they were living in the other house with the higher value.
There are two ways that things can go with the reverse mortgage. Down the road, you could either have a lot of equity because the market appreciated and the interest didn’t overtake the value or it could overtake the value if the market didn’t do so well and the balance is continually going up. There is a possibility that it could have ended up owing more than the house is worth. The cool thing about reverse mortgages is that they are non-recourse loans, which means you don’t sign a personal guarantee to get the money.
You are able to walk away from the house with no liability on you or the heirs to the home. If there is a negative equity situation, there’s no liability on the borrowers or their errors. What happens is if there isn’t any equity, the errors can or the borrowers can tell the lender to sell the home. We will take other personal belongings out of it and go ahead and sell it. They don’t have to worry about it. There’s no money to get out of it anyway.
They would have the lender sell it. This lender sells it. The lender takes a loss then they submit a claim to FHA which ensures these loans against the losses that make these loans exist. Mortgage insurance is something that FHA charges on this upfront. On a monthly basis, they add a little bit of a mortgage insurance cost each month to the balance. Building up that stock of money helps to pay those claims if the lenders lose money.
One of the things that people need to realize about reverse mortgages is the costs are a little higher than a regular loan because 2% of the appraised value is going to be taken out of the proceeds and reserved to pay those claims. If they have a $500,000 house then you have got a $10,000 upfront reverse mortgage cost. Not out of pocket but it’s taken out of the proceeds to pay for that.
That’s one thing I have a lot of people say. They are like, “I don’t want to leave much debt to my kids.” The good news is they are not on the hook for it because it is nonrecourse. If they wanted to, if they did want to keep the house in the family, they could always try to refinance it and put it in their own name.
If they get to that point where they want to buy the house after their parents have moved out or have died or permanently moved out, that’s the trigger. They have six months to go through probate, get the house sold if they want or they can buy the house for 95% of the appraised value. Regardless of what is owed on it, even if it’s underwater. They still can buy the home for 95% of appraised value. It saves the lender from having to put it on the market and sell it. Giving them a discount for that.
You get the agent commission in equity.
Yes.
Tell us examples of people that have used this and how it’s worked for them.
Apart from the most popular thing and to pay off the mortgage and not have a mortgage payment anymore. Some things that my financial planner partners like to express and tell their clients like, “Postponing Social Security from age 65 to age 70 gets you more Social Security.” You get an 8% raise in Social Security every year that you wait. If you take it out four years and you don’t take the Social Security, you get 32% more benefits per year. That’s a great thing to try to do if you can but if you are going to retire earlier and you need money, reverse mortgage is a perfect way to do that.
Postponing social security from age 65 to 70 gets you more social security. You get an 8% raise in social security every year that you wait. Click To TweetIn that way, you can live off the equity of your home for those four years instead of taking out the Social Security. When you are age 70, you get a way bigger benefit. That’s one tool. Another one is when people turn at age 72 and they have got a lot of IRA money, they have got to do required minimum distributions from their investments.
A lot of times, they want to take the minimum out but they might need more income than that and they are not working. To keep their tax bracket low and only take the minimum amount of the distribution out, use the reverse mortgage as income to supplement the RMD or their Required Minimum Distribution. Reverse mortgage proceeds are not income. They are not taxed, so they don’t add to the tax bracket because it’s a loan. That’s another way to do that.
The other thing too is people that are drawing off of their IRA moneys and their stock portfolios. In a down market, who wants to sell? That’s crazy. If that’s your only income, then you have to. If you have a reverse mortgage line of credit sitting there waiting, you don’t have to use it. It sits there and if you don’t owe any money on it, then you don’t have any interest accruing. It’s smart to set up the line of credit anytime and have it ready. When the stock market drops and you don’t want to be drawing your IRA money then draw off the line of credit on the reverse mortgage instead. You are saving yourself from selling low on your portfolio in the stock market.
Part of the reason why we don’t even have to worry about some of those is because we are an anti-stock market but the basic principle is the same. If you have got to adjust to move and do some things, it gives you that flexibility to use it however you want. I have had so many people say, especially as they move older. They say, “I know we can leverage debt but we don’t want to if we don’t have to, especially if it’s our own home.” Here’s a safe way they can do it. They are not going to get foreclosed on. They wouldn’t get foreclosed on anyway normally because the only way you can get foreclosed on with a paid-off house is if you don’t pay your taxes.
If you are not paying that then you can get foreclosed on even with the paid-off house but that’s no different here. It’s like having a paid-off house but now you got the cash, no payment, no obligation while you are alive, and no downside risk to your family down the road. If they don’t want to have the house then great. The bank will take it over or the kids can buy it back and get to keep some of the equity as well, or don’t keep the equity but they get paid the proceeds anyways through the estate. There are many different ways you could use this and leverage it as long as you are at least 62 years old.
Get money out of it to buy a second home or vacation home. Turn that into an Airbnb and those can be wildly profitable to supplement your income. They also do jumbo reverse mortgages now, which they did a long time ago. After the crash, those all went away and now they have come back. These are privately done non-FHA reverse mortgages and the total appraisal limit on an FHA reverse mortgage is $970,800. Pretty nice.
That limit’s gone up a lot in the last few years as the property values have gone up and to try to keep up with it. That’s a pretty generous limit on the FHA product. Above that, we have the jumbo products. As a huge benefit, they don’t have the mortgage insurance upfront costs, which I talked about earlier. That’s nice. Those are extremely cheap to do. The lender pays us. The costs on those are title insurance and title fees. That’s pretty much it. They are cheap to do. They go into the multimillions, so you could get a big chunk of your equity out on a multimillion-dollar home and have all those same benefits of no interest to pay.
This has been educational and I know people have questions. Two questions for you. One is if these people are in the State of Utah and you are Utah licensed. How would they best get a hold of you or even follow you online to learn more?
My phone number is 801-808-MARK. That’s my phone number and my website is ReverseMortgageUtah.co. I have a website for my forward mortgage business, which is LegendFinancialServices.com. I have a Facebook presence and Instagram and stuff like that.
If somebody’s out of state, what would you recommend they do? How would they know if they find the right person or not?
If you are out of state, I am a part of a good Facebook Mortgage Broker Group. That’s a highly ethical mortgage broker group that’s a nationwide group and we are all very focused on customer satisfaction, treating people excellently, doing an amazing job for people, and being extremely fair. I like that group. I refer a lot of people out of state to brokers in that group. That’s a good resource. If you could text me on my cell, the 801-808-MARK or you can email me. I’m at Mark@LegendFinancialServices.com.
I appreciate your time, Mark. This is a valuable and very interesting topic.
I appreciate you having me.
Everybody else, if you have questions, feel free to reach out to Mark whether through his website or by texting him. This is a strategy that you can use to not only improve cashflow but even give you more resources to be able to create more passive income and have that life where you could be financially independent, where you have enough money coming in to be able to get you out of that rat race. Go and make it a prosperous week. We will see you later.