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Reverse Mortgage Explained Pros and Cons 馃彔 - YouTube
Channel: Jumpstart YOUniversity
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- Hey there, Dominique Henderson here,
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your friendly YouTube CFP.
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Wanna talk about reverse mortgage today.
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I remember when I first heard the term,
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I was like, what is a reverse mortgage?
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And you may have had
some of those questions,
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so I wanna go through some of the answers
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to a couple of the questions
that I've ran across
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in talking about this subject
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and understanding it a little bit more.
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So what is a reverse mortgage exactly?
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I think the best way to explain this is
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to give you an example.
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Let's say you buy a house, right?
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You buy a house, it costs you $100,000.
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And let's say for simplicity,
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you're going to borrow all the
money to pay for the house.
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That doesn't usually happen,
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but for simplicity's sake,
you borrowed $100,000.
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Well, 10 years later, two things
are gonna hopefully happen.
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The first is that your
$100,000 of principal
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that you borrowed is gonna go down
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because you've been paying off the loan.
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Let's say that's 50,000.
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And then the other thing is, you hope,
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is that your house goes up in value.
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Let's say it's gone up
to $200,000 in value.
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So what do you have now?
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You have the difference
between 200,000 and 50,000,
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which represents 150,000 of
equity you have in the house.
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The problem is you can't have this equity.
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You can't realize it.
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Unless you sell your home,
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that's the only way you
can realize that 150,000
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in equity minus fees and whatnot.
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So this is where a reverse
mortgage comes into play.
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If you're over 62 years old,
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you don't have to have
any income verification.
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All you need to do is have
that 150,000 of equity,
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and you can access the equity in your home
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through a reverse mortgage.
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Now, exactly how does that happen?
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Well, you can get the whole $150,000,
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or you can get some payments
of the $150,000 over time,
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or you can just have a line of credit
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that you have access to.
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It's a lot of different options here.
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We're not gonna go into all of those.
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So you may ask, well,
Dominique, how is that different
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than just getting a home
equity line of credit
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or a home equity loan?
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Well, the first thing is you
don't have to have good credit
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in order to get a reverse mortgage.
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It's not dependent upon your credit
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or whether you have a job.
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It's just dependent upon
do you have more than 50%
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of equity in your home?
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Now, there's gonna be
different rules by each state,
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but generally speaking
those are the requirements.
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And you have to be living in that home
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as your primary residence.
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As long as you're 62 years or older,
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living in the home as
your primary residence,
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and have more than 50%
equity in your home,
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you can use this product.
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All right, that sounds too good
to be true, and maybe it is.
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Let's give you the downsides.
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This is both the pros and the cons.
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Wanna give you equal parts of
judgment and opinion on this.
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Okay, one particular
downside is that the home,
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once you pass,
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the loan balance has to
be paid in full, right?
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So in reverse mortgage, that $150,000
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of equity is being given to
you as a loan by the bank,
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and that loan has to be paid back.
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Remember, even though this
is $150,000 of your equity,
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the home, until it's sold, that
money does not come to you,
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so the only way for you to
access it is through a loan.
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So the other part is that if you pass away
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and this loan becomes due,
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let's say that for whatever reason
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while you're getting these payments
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or when you got the lump sum years ago
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that the home went down in value.
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So you're faced with this dilemma
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of the loan balance possibly being higher
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than the value of the home,
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in which case it means you
would have to write a check
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just to sell your own home.
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A couple of other things
that you may wanna consider
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is there's been a lot of scams
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because this is a fairly
complex financial instrument,
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and the more layers of complexity
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that you add onto something,
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the more opportunity for
people to try to hoodwink you
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and try to scam you out of your money.
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The other thing you wanna consider is
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that these are not the cheapest products.
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They can be anywhere from
two, 2 1/2, or 3% annually
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that you're having to pay in
order to access these funds.
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And then just more practically,
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what happens if you get
that $150,000 at age 62
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and then you live to age 95?
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How do you know that that's
gonna be enough money
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for you and what you need?
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So let's talk about
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why this might be a good product
or a bad product for you.
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Well, I think this could
be a pretty good product
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for you if, let's say that
a lot of your net worth,
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the majority of your net
worth is tied up in your home
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and you really just wanna live there.
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You don't wanna go anywhere else.
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Maybe it's going to be the
home that you pass away in
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and that you live the rest of your days,
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but a lot of your net worth is tied there
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and you're a little cash tight.
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This could be a perfect product for you,
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a perfect solution for you
to fix the cash flow problem.
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On the other hand, if you
feel that you may end up going
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to a different facility
to live out your days
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or you wanna pass on
your home to your heirs,
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that this is probably not
the best product for you.
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You just wanna think down the road
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about how the value of
your home may change
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and all these different things.
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I don't know that it's the best solution
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if you wanna pass your
home down to your heirs.
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The other thing you just wanna think
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about is just the logistics
and the math of this.
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Whereas in a traditional mortgage,
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you have an asset like your home
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and then you have a loan against
it, which is the mortgage,
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every payment you make goes
down to reduce the principal
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and pay back a little bit
of interest to the bank,
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to the person that loaned you the money.
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Whereas in a reverse mortgage,
the opposite happens, right?
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So instead of you making payments
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that are gonna reduce your loan balance
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and therefore increase the
equity you have in your home,
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the reverse is happening.
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That's why it's called a reverse mortgage.
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Payments are being made to you,
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or that lump sum is being given to you,
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in which case you're
increasing your loan balance
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and you're decreasing the
amount of equity in your home.
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You just wanna kinda think of the fact
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that you are monetizing your
equity right now, right?
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The whole point in building up equity
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in an asset is to eventually monetize it.
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So the only way to truly
monetize it is to sell it.
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But if you wanna take a loan
against it, that's up to you.
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And that's what a reverse
mortgage is designed to do
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for homeowners over the age of 62.
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In final considerations,
I would just say this:
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on one hand, you may
be over the age of 62,
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maybe you're headed towards retirement,
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and you see that you haven't
saved enough for retirement
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and you're trying to fill that
cash gap that you might have
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and you've got a considerable
amount of equity in your home.
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You don't plan to pass on
that home to your heirs.
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That's not a primary concern.
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And this home will probably be the home
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that you pass away in.
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This could be a perfect solution.
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You may wanna talk to a mortgage
broker at your local bank
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to figure out if this is something
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that you would want to use
in your retirement solution.
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On the other hand, if
you've got plenty of assets,
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you've got money in a 401k,
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and you're not gonna really
have any cash flow issues,
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you would rather keep
the home in the family,
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this is probably not the product for you.
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You really don't need it.
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I would say this is usually for people
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that need to spend down
their assets all the way down
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and don't really consider
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or won't be considering
leaving behind an inheritance
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for their heirs.
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Okay, that wraps up this
episode of Office Hours
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and reverse mortgages.
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Look, if you have additional questions,
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leave them down below
in the comment section.
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I would love to answer
anything that I can.
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Also, consider subscribing to the channel.
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Give us a thumbs up if you liked it.
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We'll see you back next time, bye bye.
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