Thread by @roncaruthers

1. How reverse mortgages work: A Primer.

Reverse mortgages are possibly THE most misunderstood financial instrument out there.

In this thread, I'm going to cover the basics of how they work AND how to use them.

You should pay attention even if you're younger.

2. So, first off: It is a mortgage.

That's it.

JUST. A. Mortgage.

However, unlike a forward or traditional mortgage, this one works, well, in reverse.

So first, let's go over the rules, and then we'll discuss how and when you might want to use this vehicle.

3. To qualify, you can only have one at a time, and it can only be on your main residence, where you reside at least 6 months of the year.

If you're married, at least one spouse has to be 62, except in Texas, where both spouses have to be 62.

4. However, you should read on even if you're nowhere close to that...

You'll see why in a minute.

OK, some more basics:

You have to pass a basic income and credit test, since you need to be able to pay the taxes and insurance, just the same as if you paid off the house.

5. Again, YOU still own the house, the title is in YOUR name and the mortgage company is NOT your landlord.

So, you have to fix stuff, keep the place up, and, like I said, pay the taxes and insurance.

Oh, and you have to have at least 50% equity for this to work.

6. The reason for the 50% equity is because, since you aren't required to make a payment, although you can, the interest will be tacked onto the principal.

BUT....

NO REPAYMENT OR PAYMENTS ARE REQUIRED until the last living borrower

-dies
-decides to sell
-decides to move.

7. AND, it is a non-recourse loan....so if the last living borrower dies and the house is upside down (worth less than what's owed on it),

the heirs can just walk away, AND they won't be hit with a tax bill.

They don't have to DO anything.

8. IF the house is worth more than what's owed on it, then the heirs can:

-refinance the loan into a forward mortgage,
-pay it off and keep it,
-OR sell it and pocket the difference.

And they have one full year to do it.

So, no one is 'coming' to take their house.

9. You can also PURCHASE a home with a reverse mortgage as long as you have cash down for the equity requirements, which are 30 to 50% depending on your age at the time.

Now that you have the basics down, let's discuss how to use this once you're 62, and how to plan for it now.

10. First, you can use up to 50% of your equity to:

-offset a cashflow shortfall
-improve your home
-As you please
-As a 'buffer' asset (more on this in a minute)

11. Remember, YOU still own the house.

You simply have an increasing loan with the lender with no REQUIRED payments....

...although you can make them if you want to.

Although, if you don't HAVE to, why WOULD you?

12. And, appreciation above the loan amount belongs to your or your heirs.

AND< you have an increasing line of credit as the house increases in value.

13. So, once you turn 62 and have 50% equity, you can use this to:

-Pay off your existing mortgage,
-have no more payments AND
-You get a credit line for the rest of your available equity.

BIG DEAL: That equity line canNOT be cancelled.

14. If you were paying attention last year, TONS of normal equity lines got shut down during the Covid crisis and market meltdown early in the year.

Hell, they shut down equity lines of credit here everytime we get an earthquake or fire, which is pretty much every other week.

15. So, THIS equity line CANT be shutdown, which is a huge feature.

BTW, in addition to the equity line, you have 2 other options to access your money:

1) as a lump sum; and

2) as a monthly income stream....either for tenure (life) or a set term.

16. Home equity is a HUGE asset class in this country.

According to @StatistaCharts there was $18.72 TRILLION in US home equity at the end of 2019.

BUT, it is a DEAD asset in that you can't access it and it doesn't 'earn' money.

It rises or falls regardless of a mortgage.

16b. To give you some idea of comparision, Vanguard JUST passed the ONE trillion dollar in assets mark.

17. In essence, equity is worthless.

Yes, I know, it feels good to have your home paid off.

And @daveramsey tells you you're 'supposed' to.

But WAY too much energy is spent rushing to pay off an asset that you don't have to make a payment on anyways once you're 62.

18. My mission is to change retirement in this country.

And it starts by understanding mortgages....both forward and reverse, since for most households more than 50% of their money goes to housing and taxes.

OK, so lets talk about some ways to use this.

19. First off, let's talk about 401k's.

You know I hate them unless you just started following me because you postpone paying taxes AND calculating the tax.

BUT, think about how it works: you contribute money for years, and they you withdraw that money over time later.

20. A reverse mortgage is EXACTLY the same.

You pay your mortgage for years, and then when you retire, you can eliminate that payment and/or access that dead equity inside your home.

Here are some ways it would make sense:

21. First, you can use the line of credit as a buffer asset.

What is a buffer asset?

It's an asset that protects your OTHER assets...you know, like a buffer.

Example:

22. If you withdraw money from your stock market accounts when the market is down, you're basically driving that asset into the ground, because you're having to sell more shares to provide income for yourself because of the losses.

BUT....

23. If you had a Reverse mortgage line of credit, you could draw from THAT TAX-FREE during the years your other investments were down to preserve those other assets and give them time to recover.

If you do that, your money will last much, much longer

24. and you can always pay the line back off once the other assets have recovered.

And remember, they canNOT shut that line off like a forward home equity line of credit.

OR....

25. You could use the equity as a term monthly payment between whatever age you retire at and 70, to allow you to delay Social Security until then, where your payments increase by 25-32% over what they would be if you take them at Full Retirement Age.

26 As an aside, age 62 is THE most popular time to take SSI,

but because your benefits are diminished, most Americans receive the LEAST amount of money with this strategy.

27. If your benefit at FRA (full retirement age) was going to be $2,000,

it will only be $1,500 a month at 62....

but it will grow to $2,640 if you delay benefits until age 70

28. If you took the earlier benefit and lived until age 95 (yeah, I know, I'm just making a point here)

You would receive $864,608 in total benefits.

BUT, if you delayed your benefits until age 70, you would receive $1,249,802

An ALMOST $400k difference.

29. Even if you don't live until 95, if you live past 81, you will receive more money by delaying benefits.

SO...the reverse mortgage can allow you to bridge that gap, and not even notice it.

30. There are many, MANY more uses, and I'll get into them over the coming days, but the bottom line is this:

Even for wealthy individuals who don't 'need' the money, it can be an effective way to access liquid capital TAX-FREE.

31. While financial entertainers like @daveramsey may disagree about this,

SERIOUS financial researchers Like Dr. Barry Sacks, Jamie Hopkins, @WadePfau and myself have repeatedly stressed the value of having access to tax-free liquid money through a reverse mortgage.

32. How can you use this when you're younger?

Well, simply knowing that you can invest money in OTHER asset classes that provide great liquidity AND greater returns than trying to pay off your IL-liquid house and still NOT have a mortgage payment at 62 is life-changing for many.

33. And THAT is your primer on reverse mortgages.

In the next few days, I'll write more about how you can use them as a buffer asset with examples, because that is NINJA.

/end.

Hope you guys learned something.

Please share if you did.