Why Sooner Is Better Than Later for a Reverse Mortgage, with Kevin Guttman

0:02 So for most people with their real estate their home in many most cases is our primary asset at the end of the life for retirement. And yet we tend to treat it differently than we do our other assets stocks bonds retirement funds things like that bank accounts. And you know lying to Kevin you know told me this we wouldn't tolerate is your return on our you know investments though maybe we do and shouldn't at times. But most of us do or don't take advantage of maximize the equity value of our home as part of our retirement. So Kevin Gutman who is a certified reverse mortgage professional with C2 Financial and the leading companies in country is here to help us understand how starting sooner with a reverse mortgage is better to maximize the equity of your home and the tool of reverse mortgage how they can help you help you do that. Coming back to our podcast Kevin Gutman thank you so much for joining us.

0:57 Yeah thanks Bill. Great to see you again. So let's talk about what first off let's just say from the beginning why do you think people don't take the equity as their home equity as strategic as they do stocks bonds IRAs and things like that?

1:13 You know that's a great question. I think in people's minds that is what they have set aside for inheritance for their kids. And so they don't think about putting that money to work for them I.e. Growing in interest each month through a line of credit compound interest. They kind of have that money preserved as it were in the back of their head like this is the money I'm passing on to my children. The hard thing about that though is and you know Bill most people most baby boomers specifically is a first generation that had to fund their own retirement. And most of them have under funded it. Prices are higher. They're concerned about outliving money because they're living longer. So, really all it does is when somebody unlocks that equity, it just allows everything they have to last longer.

2:08 And so, when you say unlock the equity, you're not talking about selling the house, you're not talking about, you know, taking the money and putting it into some investment scheme. So, what's the actual mechanic that somebody uses to, quote, unlock the equity in their home?

2:23 Yeah. So, on average, somebody can access about 35% to 45% of their equity, depending upon their age, the interest rate, etc. So, let's just say 40% for sake of example. So, they own a $500,000 house, they can access about 200,000 of that. And they can access that three ways. Loans

2:44 For a second. That's an important distinction. So, you have basically something that's worth $500,000 and for most people, they can really only access a small portion. It'd be like going to the bank and you have $5,000 at you know, at Wells Fargo. I won't badmouth my bank, my bank at Wells Fargo, it's not pleasant. And I think this could happen. I could walk into Wells Fargo and I have $5,000 and they'd say, "Oh, you can only have $200,000 of your money back." I think I put on a mask and get a gun and rob the place to get my own money back. But we put that up with a house and I think the reasons why are lenders need to have a loan to value for risk. They're not going to lend all the money. And also, because you have to qualify and for most loans. And so, seniors often can't qualify for all the equity on a traditional mortgage. So, they might only qualify for 35% to use your number on average. So, really you have this $500,000 asset, but the banks only allow you to access a part of it. Does that make sense?

3:41 Correct. Correct. They're counting on their balance sheet cuz it keeps their loan balances in order. So, they're benefiting from your equity cuz your loan to value cuz they're strict rules. And here it's your house and you can't benefit it through normal traditional means.

3:55 Yeah, so the risk the lender has is it's an open-ended loan. Most of them are open-ended. They don't know how long somebody's going to stay in the home or keep the keep the loan in place. So, they don't know what the interest rates are going to be. They don't know what property values are going to do going forward. Now, of course, we have historical data we can look at, but they hedge where they're going to only loan 35 and 45% of the value of the home. The younger you are, the less you get. The older you are, the more you get. But, what I did is we have a tool, a program, where we can illustrate scenarios. And so, I went in to this program the other day, and I looked at a tale of two brothers to see what was better, to take it earlier or later. And the data, the math, is overwhelmingly better to take it early. So, Bill, you might remember when we were younger, when we were in our 20s, it financial planners told us, "Start now. Start investing now. You'll never get this decade of your 20s back." You remember?

4:57 Correct. That's what the 60s are for a reverse mortgage. We want to You want to start as soon as you can, as soon as you have enough equity, as soon as you can qualify. You're old enough, you have enough equity, you have the right property type, you can prove your income, you have good credit history. Do it then, because you're getting time in your favor, which you can never make up.

5:20 And the time is both more revolutions, more years, and then the compounding effect of those revolutions, right? So, if you have 20 years versus 10 years, the step the step we use of two brothers, you have a brother Mark and John, one starts at 62, one starts at 72. And so, Mark has just 10 more turns than John does, and each of those compound on top of the prior year, take advantage of compounding interest.

5:46 I think it was Albert Einstein who said compound interest is the eighth wonder of the world, right? Yeah. Yeah. And you want it. The banks know this. The banks use this against us every day.

5:57 Right. But now with the reverse mortgage, you can use it in your favor. You can use compound interest in your favor. For somebody that has a free and clear home or a low balance, it's a no-brainer. They should do it sooner rather than later. In fact, in both cases, somebody is just eliminating their payment. It also works better in their favor. So, the scenarios I've run, the math supports doing it sooner rather than later.

6:21 So, you sent me a tell two brothers a great presentation. And I would say anybody who you know, wants to work with Kevin, wants more information, I'm sure he can send you a copy of the presentation as well details. So, you talk about two examples. And it was interesting cuz one even had a lower-priced house, the younger one, right? So, he didn't you didn't give him the 10 years appreciation. John starts sooner, so his house is worth more. You kind of made this a pretty fair scenario. And Mark still has a balance, whereas John is free and clear. Again, you kind of make this a pretty fair scenario. And then you show what their options are as far as their line of credit. And I would look at this point to say, "Well, the younger Mark, you know, has less." That seems discouraging. So, talk about why is it that shouldn't be discouraging, but that's just a starting point and actually ends up with a better result.

7:07 Yeah, so in that case, the younger brother can borrow about 37% loan-to-value at 62. The older brother about 43%. And as you said, the older brother's value is actually higher than the younger brother, and he can borrow more than the younger brother. But over Correct. But over time, it works this is this is beautiful. So, here's Mark on the left. These are These are both age 72. John is just starting. Mark has had his reverse mortgage in place in a line of credit for 10 years. And the line I want to point out is the green line it says LOC equity, line of credit equity, yep. So, you can see Mark is a 100,000 ahead of John because he started earlier. So, he's got 10 years just like we've been talking about. He's got 10 years of compound interest growth. He started at 193, now he's got 449. John waited and had his house free and clear but started at 72 and he's already 100,000 behind. Let's see if he catches up. Let's see what the next we'll say age 86. Let's go to the next one if you could.

8:28 Here we go. Okay, so now they're 14 years older. Same just for people watching this cuz it could be a little confusing, I had to look at this a couple times. You basically are using the same house, just one started 10 years ago and the other one starts now with the reverse mortgage. So, the assumptions on the appreciation of the house, the value of the house, they're all the exact same.

8:47 It's apples to apples. Yes. What we did is we used the appreciation growth from Mark's 650 and applied that over 10 years to John and that's how he got the higher value when he started. So, now Mark is 24 years into his reverse mortgage, John is 14 years in. And Mark is 200,000 ahead. He's got 200 access to 200,000 more than John. Now, what does that mean? So, the line of credit, people can access funds three ways with the a reverse mortgage. Lump sum, line of credit, or monthly payments. I would say the vast majority of people start with the line of credit and then down the road they convert that to cash, lump sum, or monthly payments. So, when I meet with people, I'll ask them. I'll say, "You know, here as you are in or approach retirement, do you think you're going to need more or less money?" And almost inevitably, they say more because they see insurance rates that are going up, property taxes going up, inflation. They know they're going to need more money.

9:56 The equity less. What do you count on? None of that's going down. Electricity's not going down. Water's not going down. Property taxes aren't going down. Income taxes aren't going down. None of that's going to go down.

10:06 Exactly. So, they're nervous. They don't know if they have enough money. So, it makes it makes total sense to do it sooner rather than later. And what I tell people, I said, "Cuz sometimes people don't need it. They don't need a reverse mortgage." I'll say, "Well, do you have a source of tax-free money?" No. I say, "Would you like to start giving your estate away now while you're alive to your kids or your charity or whoever while now versus when you're gone?" They say, "Now." So, all this does is this just unlocks more money for people. And the people that don't need it, I say, "Look, keep it as a safety net. You may never touch the money. It's like a credit card bill, you know. You have a $10,000 limit, you only borrow a thousand, you pay interest on a thousand. Same thing here. You only pay interest on Look at Mark. He's got a $100 loan balance. And he has access to a million bucks. How great is that?

11:05 Now, the reserved equity represents the amount the bank wants to make sure will allow you to access to maintain their risk ratio. It's not money that you have. It's not money that you can access unless you sell the property. It's a kind of theoretical number that the bank's saying, "We'll lend you in this case in Mark's case, we'll let you access 1,078,000, but we won't let you borrow the additional 242 cuz we want to hold on to that as protection." So, it's not like that the fact that his reserve equity is lower is actually a good thing. He's able to access more of the equity of the house because he started sooner. Is that Is good

11:41 Correct. And also the top line, the projected home value, we use a 4% appreciation per year. That's what FHA says is a reasonable number on average. So, his home is worth 1.3.

11:56 Right. They're both worth 1.3. Right. But you're right. In Mark's case, he can access a million of that and John is what? 870, I think it says. Yeah.

12:08 Right. And so, this is what you have the opportunity to access before you pass, which means you could either buy the Take the money out and invest, perhaps getting a better return for your money than the lender's interest rates. So, you can use this money to you know, buy a second home, to buy other investments that yield you income, give gifts, you know, pre-distribute, give charity. You can do whatever you want with it. It's really your money. But, what you're pointing out here is you have access to a million 78 versus 870, and the only difference was one started the same exact process 20 years sooner, I'm sorry, 10 years sooner, and as a result, has access to more of the equity and more flexibility at their at the end of their process.

12:50 Spot on. Spot on. You know, the other thing I would say, you mentioned about use the funds however you want. That's exactly true. People can access this equity, use it however they want. It's very flexible. The only restriction the government puts on these funds is they cannot buy an annuity. In fact, when somebody goes to buy an annuity, there's a question on the application, are these is this money from a reverse mortgage? That's the only restriction the government puts on there. So, they can remodel their house, they can buy a second home, they can help their kids with the down payment to buy a house, they can travel, they can buy a car, replace the roof, anything. It's wide open. The one restriction is they can't purchase an annuity because in effect they're already unlocking and annuitizing that money. So, the government doesn't want them to tie it up with another program for X number of years cuz a lot of times annuities have a surrender period.

13:43 Correct. Three, five, seven, 10 years. And they don't want them to pay more fees because they already have access to that money. Right. Now, the these products, the HECM is almost the vast majority, I want to say 90% plus are just rate mortgages, correct?

14:00 Yeah, we saw a stat recently. It's actually like 99%. Yeah. Which is counterintuitive because people are used to getting a fixed rate.

14:09 Right. But with a fixed rate their interest rate's higher, you get less money, you have to take all the money at closing. It's a closed-end loan. With the adjustable, it's open-ended. As I said, you can get the money three ways, lump sum, line of credit, monthly payments. The interest rate's lower and you get access to more money. So, overwhelmingly people choose adjustable. Funny story, Bill. Had a lady one time was insistent on getting a fixed rate. And I said, "Look, it's not my money. I'll help you get whatever you want. I want you to understand the options." I said several times, I said, "Is this sure Are you sure this is what you want?" I don't want an adjustable rate. It's going to keep me up at night. I'm going to worry about it. Will the interest rate go up? Well, of course it's capped. How much can it go up? There's a floor and a cap. But anyway, she was adamant that she didn't want a or a fixed adjustable rate. So, about a year in you know, she gets all her money up front with the fixed. She calls me cuz interest rates have gone up. Although it didn't affect her cuz she had a fixed rate. But cost of living increased, inflation. Her insurance rates went up. You know, like in California, I'm in Colorado and just insurance rates have gone up. Property taxes have gone up. She goes, "Okay, I'm ready to get the rest of the money." And I said, "I'm sorry, Marsha. You chose fixed. There's no more money unless we refinance." And of course, this just happened to be during when interest rates were rising, 40-year highs we've had in the last couple years. And property values have been flat. So, she couldn't really do anything.

15:41 So, that's the one example I had where somebody insisted on getting the fixed rate. And she wasn't ended up the adjustable would have been better for her situation.

15:52 What is the I know there's a range of rates on the adjustable, right? It depends on your margin and your credit score and how much LTV. Give me a common, you know, the loans you've done in the last 12 months. What's kind of the low, high, and kind of the middle of what an adjustable rate interest rate would be today on a

16:08 Yeah. So, we're we actually are lower than conventional rates. I would say right now we're in the mid-fives. In the last year, we've been as high as the mid-sixes. So, that's the range, 5 and 1/2 to 6 and 1/2.

16:22 And so, what that means is that if you're if it's 5 and 1/2 or 6 and 1/2, whatever that number is at the time, and you have some other alternative. Now, many people like I'm a business and I'm often involved with opportunities where, you know, we're borrowing money or we're arranging a loan for a customer or some other transaction where the return is much higher than 5 and 1/2, 6 and 1/2. We do certain financing of private estates where our you know, our ROI could be 12, 14, 20%. And I'm getting other people invest in these and I invest in it myself. But I could see a case where maybe I would invest more if I want a credit like this that I don't have I don't have that kind of equity. I might write a check against it and then when the funds come be due, if the rates have turned around, I could pay it back off. There's some flexibility because it's a line of credit. And so, I think that's the thing nobody should be reckless. This is your This is your nest egg retirement. But if you can borrow money at 5 and 1/2 to 6 and 1/2 and get a return of 7 and 1/2, 8 and 1/2, 9 and 1/2 safely in a in a proper way, this is an opportunity to even take it further, and this is where you need to talk to financial planners to see if there's some opportunities for you.

17:31 You know, two things with that, Bill. What you've just described is arbitrage, which is what the banks do to us every day. We go in and put our money in the savings account. Exactly how what others bank. That's exactly You go downtown in any city, there's huge towers with the name of the bank on it. They take your money at pay 0.12% get 8%, and then they buy a building and put their name on top with your money.

17:52 Right. That's the arbitrage. They're earning that spread. Yeah. What you've just described is a way for somebody to earn arbitrage in their favor. So, they have a rate at 5 and 1/2 they're borrowing, and you can get them we'll just say 10 and 1/2. That's five points in their favor. The other thing about that is what a lot of people don't know is you can make a payment on a reverse mortgage. It's optional. It's not mandatory, but you can. Why would you do so? So, let's say somebody has a taxable event. They convert their IRA to a Roth or whatever, or they take money out. There's They have a tax burden. They sold a piece of property, whatever. Okay. So, they borrowed money from their reverse mortgage, but now that investment they had is paid back, and so now they have a chunk of money they can pay down on their reverse mortgage to get it to we'll say like mark $100. You don't really ever want to go below 50 or $100 because if you close your line of If you close your reverse mortgage, pay it off, they're going to close the loan. So, you want to keep a small balance there, 50, $100. Okay. So, now what they did is they just paid down a chunk of money and paid interest. Now they're going to get issued a 1098 if they pay more than $600 in a year in mortgage interest, which is taxable or interest that they paid that they can claim on their tax return. So, that's a strategy a lot of people don't know about.

19:20 One is the arbitrage. Two is creating a tax deduction in your favor by paying interest on your mortgage to get a tax deduction.

19:28 And the good thing with this product is it's so flexible. You know, paying taxes, paying early, you know, there's certain things that like in my case, I had a great year. But I'm going to pay more taxes than I have in prior years. I mean, there's certain strategies and things you can do, but at the end of the day, if you make, you know, a lot of money, you're going to pay a lot of taxes. And so, and to some degree, when I maximize my opportunities, if there's things I can pay for now that I might otherwise cash flow next year, why not do that? And so, for $25,000 here and there, and that becomes significant if I have to sell stock or go to my securities or maybe take money out of my business account, which I don't want to pass a certain point. And I have a line of credit in my business line I use sometimes, but a HELOC on your house would be a more effective tool, lower rate, and you're paying yourself back in a sense with that equity, rather than paying the bank, you know, a high a high rate. So, I think, again, these arbitrage opportunities are things that you shouldn't take lightly. I wouldn't borrow the money and lend it out on cryptocurrency to pay it back. I think that people lost a lot. But I think who did a business usage of this, creates more opportunities. And so, I think you made a really compelling case. Now, obviously, Kevin, I appreciate that you've done this on a theoretical case, but I imagine your business is when people have these questions or financial planners who want to think about integrating this into their package, that you do this individually. Do you sit down with people and create an individual analysis like Mark and John with their options are?

20:58 Absolutely. I always say like a reverse mortgage is kind of like a fingerprint. Everyone's unique. So, I mean, I've been doing reverse mortgages more than 10 years, and there's never one case that's like the other. Now, the program is the same, right? Fixed or adjustable, we have a HECM or we have the proprietary, but we try to listen to what people are trying to do. I always say, "Nobody comes to me to get a reverse mortgage. They come to get what a reverse mortgage can do for them." They've got a medical bill. They're going through a divorce, and they have to pay out the spouse some half of the equity. They want to help their kids. They've had a financial Like I have a lady right now, her business she has a flower shop in Hawaii, and business has been down. And so, she's getting the reverse mortgage to now make her payment optional. She does not have to pay it every month. She can pay it if she if she's able to, but she doesn't have to. So, it's just going to alleviate some of the stress in her in her monthly budget. But yeah, we like to sit down with people and get to know them whether in person or by Zoom, and just understand how this can help them make help explain how it works so they understand. And I the Bill, I always tell people I say, "Look, you may not do it, but you need to understand it's a tool in your tool chest. It's available to you if you need it."

22:20 Well, Kevin, I really appreciate going into detail on the advantages of starting early. I think it's one of those things that like a lot of things we all say we need to do or could do or should at least investigate the opportunity. I think reaching out to you makes a lot of sense on the program. For anybody who wants to sit down with Kevin and go through what your options are, the reversemortgagerevolution.com is the website. And then down below we have his contact information. He is a certified reverse mortgage specialist with C2 Financial, one of the leading companies, one of my favorites. And his toll-free number [phone number]. Kevin, what states do you service? I'm in 20 states. Hawaii, Washington, Oregon, California, Idaho, Utah, Arizona, Colorado, New Mexico, Texas, Kansas, Missouri, Oklahoma. I'm going through the map in my mind across the

23:12 And those are done. See, Kevin is a national company, so those are done. You have colleagues in those other areas, I know, with your team. You guys are able to really help anybody. So, again, Kevin's a great resource for should I get a reverse mortgage? And if you're thinking about the answer, at least you should get the answer is yes, get the analysis. Whether you do or not, may or may not sense. Kevin can help you with that. Kevin, thank you for coming back on Reverse Mortgage Podcast. I love having you. Thank you for going to details. I really appreciate it.

23:36 Yeah, my pleasure. You know, you showed the website right there. Somebody can download a consumer guide that I wrote, which is answers a lot of questions, has some case studies in there, compares a traditional mortgage with a reverse mortgage, compares a HELOC with a reverse mortgage line of credit. It's free, and it's just designed to really answer a lot of questions so that people feel comfortable if they choose to do it.

24:01 Well, fantastic. Kevin, thanks again for being on and for your education and the way you approach this business. I really appreciate you guys' approach. Great to see you, Bill. Thank you. And for the rest of you, this is the Reverse Mortgage Podcast. We have a new episode every week, usually with top originators like Kevin Guttman, often times with vendors, management, to help us be better at our profession, helping serve our customers better, and unlocking the home equity that they want to take advantage of. I'm Bill Gross at BillGrossProbate. If you like this, like, subscribe, send me a comment. If I can help in any way, feel free to reach out. As always, make today your best day ever. Thanks so much.