Speaker 0 | 00:00.168
Most people don't realize there's $14 trillion sitting in home equity. I often tell people, they say, I don't believe in reverse mortgage. And I say, this is not a faith-based product, it's a math-based product. People are making it way too complicated. Everybody has three buckets of wealth. Bucket one is a client's ability to make money. Bucket two is what most financial advisors are concentrating on, and that's everything from 401ks to IRAs to life insurance. Bucket three is the mistake that people are making over and over again. is spending money out of bucket two before they spend money out of bucket three.
Speaker 1 | 00:31.972
What is a reverse mortgage interest deduction?
Speaker 0 | 00:34.233
How a reverse mortgage works is basically for two different groups of people. The first group of people is about 50% of the population and they have their house paid off. So we will give them somewhere between 30 to 50% of the value of their house and we'll send them tax-free checks every month or...
Speaker 1 | 00:51.597
What's the big difference between that and just a home equity?
Speaker 0 | 00:54.237
Home equity loans have three problems. The first one is if you pull $100,000 out, you got to pay back. That's great if you're 30 years old. It's not great if you're 65.
Speaker 1 | 01:03.235
The second reason is if you have a variable rate today, could you lock it into fixed in the future if you wanted?
Speaker 0 | 01:09.278
Just like any regular mortgage, it's not a permanent decision.
Speaker 1 | 01:13.099
How does reverse mortgage break down?
Speaker 0 | 01:14.880
All the costs, Caleb, are the same as any other regular mortgage. The difference is...
Speaker 1 | 01:19.177
Harlan, welcome back to the Better Wealth channel and show.
Speaker 0 | 01:23.599
Hey, it's great to be here, Caleb. Thanks for the opportunity.
Speaker 1 | 01:26.304
So it's awesome having you here. Your team at Movement actually was our sponsor at our last event, and you weren't able to make it. You had great excuses being with the family, but part of me was very sad because you are one of the most electrifying speakers when it comes to reverse mortgages. And what's interesting is a lot of people on this channel know my stances on life insurance. They know that a lot of people call life insurance a scam, which I hate that word by the way, but like... you know, a lot of people misrepresented and a lot of people maybe over exaggerated. And so I try to be very fair. I try to say, this is where life insurance has had problems. These are where people should not sell permanent life insurance, but it's not a scam. And here's why. And try to like educate, educate people. And so that, you know, all coins have three sides kind of deal. It's not, not just good or bad. Sometimes there's, there's the middle wisdom part. When it comes to reverse mortgages, reverse mortgages have, I think, an even greater negative stigma than life insurance, and sometimes rightfully so. And it can be one of the most powerful strategies out there when it comes to retirement planning. And with that opening, I want to create a masterclass on reverse mortgages where if someone's asking the question, should I do this for myself? They can watch this. Maybe an advisor is watching this and saying, I want to better understand reverse mortgages for my clients. They can watch this. And there's no better person, period, to talk about this than you. And so, again, welcome to the show. And I'm excited to have some key takeaways as well because I've seen you present a couple times. And every time you present, I write something down or say, like, that's something that not only applies to reverse mortgages, but that analogy will help me in other areas of my life.
Speaker 0 | 03:21.140
Well, that gives me a huge responsibility, but I'm willing to go after it because this is one of the biggest single mistakes, one of the biggest single important issues from a financial perspective in our generation. I'm part of the baby boomer generation, which is talked about a lot. One of the largest generations, the largest generation that's ever lived on the earth. When my dad came home from the war in 1946 and started this whole thing with my older brother being born, and I'm kind of the end of the baby boomer generation, 1946 to 1964, 72 million people that are now moving at an alarming rate into retirement. And it's going to affect this home equity issue, which reverse mortgages are a big part of, is going to affect every single generation coming after us. And I feel a huge responsibility, not only to my children, but especially now to my six grandchildren and what kind of life they're going to have, depending upon how we use one of the most valuable resources that we've ever been entrusted with. And that is home equity. Most people don't realize there's 14 trillion, that's with a T, 14 trillion dollars sitting in home equity, just people over 62, just their primary residence. It's a phenomenal amount of wealth. There's never been that much wealth in one place ever. And we're missing a whole scenario of how to properly use it. We've done a great job in the mortgage industry and in the real estate industry of helping people gain a tremendous amount of wealth. Everybody's heard that you can build wealth through real estate. Many of us bought houses for $50,000, $100,000, $200,000 and it's worth a half a million or a million dollars in some cases. So we've created a tremendous amount of wealth and home equity. But the question is, how is this used? It doesn't make any difference how much we have. It's how we use what we've been given. And that applies in just about every aspect of life, whether it's our talents, whether it's our savings accounts, whether it's just our knowledge and abilities. So what I don't want this generation to miss is what happened with Sears, what happened with Blockbuster, what happened with BlackBerry, what happened with Kodak. They all missed where things were going in the next 20 to 30 years. Sears is... The last Sears catalog was published in 1993. Amazon started in 1994. Sears was around for 100 years, more than 100 years. They should have been the major retailer going into the whole scenario of delivering goods because they had 100 years of experience and they missed it. When you take a look at the wealth of our generation, and I often show this slide of bucket one, bucket two, and bucket three, it's really that simple. I'm just a farm kid from Wisconsin who never went to college. And if I figured this out, a whole bunch of people should figure this out. And people are making it way too complicated. Everybody, Caleb, has three buckets of wealth. Bucket one is a client's ability to make money and create wealth by wages, commissions, business earnings, whatever. Bucket two is what most financial advisors are concentrating on. And that's everything from 401ks to IRAs to life insurance, annuities, et cetera, money that you don't need today that you're setting aside for the future, the nest egg. Bucket three is the home equity. What's really strange is people spend a lot of money and a lot of time enriching their wealth in bucket three, sometimes even more so than in bucket two. Only five to 10% of people's income goes into your bucket two as a financial advisor. But bucket three, we get anywhere from 25 to 30% of the average person's income as their paying us mortgage payments, they're putting money into improvements, they're putting money into taxes, insurance, and so on. So there's an incredible amount of wealth sitting in bucket three, very evenly distributed. 80% of the people in my generation own a house, and many of us own two or three houses, investment properties, second homes, whatever. So the mistake that people are make, the mistake that people are making over and over again. is spending money out of bucket two before they spend money out of bucket three. This is a very basic paradigm shift, and everybody thinks a reverse mortgage, home equity, is the ace in the hole, the loan of last resort, the last place that you go for money. If I'm broke, then maybe it makes sense to do a reverse mortgage. And unfortunately, most financial advisors think the same thing. Most attorneys, most real estate agents, most mortgage people are perpetuating this idea that you don't use home equity until you're broke, that that's the last place you go to. The math, I often tell people, they say, I don't believe in reverse mortgage. And I say, this is not a faith-based product. It's a math-based product. If you look at the facts, then this is what it shows and what it has shown with thousands, hundreds of thousands of Monte Carlo simulations, which a computer can do sometimes in seconds, proves over and over and over again that that bucket three should use before bucket two. I've proven that in my own personal situation along with thousands of clients over the years, that if you use the home equity first and you make it a part of your planning right from the beginning, that then bucket two will last longer and three major things happen. You have more cash flow, which is kind of important. People say money isn't everything, but it's reasonably close to oxygen. You just need it. And secondly, your tax bill goes down. This is a huge tax strategy, especially for people that are wealthier, that have more money in bucket two. And often net worth goes up and thus legacy to the next generation and the next generations as you're looking at kids and grandkids. So it just bothers me that people look at this as kind of a fringe thing that, yeah, I believe in reverse mortgages, but I'll use it when I don't need it anymore. Whereas it's you don't just go to an umbrella when it starts to rain. You've got an umbrella before it starts to rain. That's really the important thing of using that bucket three long before it becomes a necessity.
Speaker 1 | 09:17.379
Yeah, Harlan, you said a lot of things. And so I want to just recap a couple. So number one, you talked about Monte Carlo simulation. What is that for the listener who maybe doesn't even know what that means?
Speaker 0 | 09:31.196
Yeah, I shouldn't have glossed over that. Monte Carlo simulation is simply a statistical analysis of putting Everybody's different financial situation and somebody that's got a lot of money in bucket two, somebody that's got several million in bucket two to some people that have a couple hundred thousand or maybe fifty thousand or whatever. Somebody that has a million dollar house that's not paid off or a five hundred thousand dollar house that's completely debt free and looking at okay as they go into retirement based on this amount of need of income. what happens and what is the possibility of them getting there, whether they're using stock market investments, whether they're using bonds or whether they're using life insurance, annuities, et cetera, and looking at all the different possibilities of how do you get to the end of your life without running out of money. Yeah.
Speaker 1 | 10:16.154
And it's, it's looking at thousands and thousands of scenarios and block black swan events and all, and then saying like, that's where the 4% rule historically came. to say like hey if you take out like over 30 years at four percent you'll have a rate of failure of x well now if you factor in these products and strategies now you could your rate of failure decreases or you're able to take out more money with the same rate of failure and so what you're saying is a reverse mortgage instead of look being looked at as a fringe like academically people if it's used in... in a retirement strategy could either decrease your chances of running out of money or increase your cash flow with keeping the same risk. Am I articulating that properly?
Speaker 0 | 11:11.074
Yes, exactly correct. In fact, Money Guide Pro, for example, is one software program that shows the possibility of getting to 90 years old or 95 or 87 or whatever number you want to put in. What's the possibility of getting there without running out of money? We have sometimes put in people that were at 50, 60, 70% chance, meaning that there was a possibility of a 30, 40% chance of failure. And we put in the reverse mortgage and took away their payment at 62% instead of them continuing to make payments as most people are used to. Or we put in additional tax-free income coming out of bucket three, out of their house, starting at 62%. Many times we take it from 50, 67% right over to 99%. There was virtually no chance they were going to run out of money if The reverse mortgage was implemented early in retirement instead of as a defensive scenario at the end when everything went bad and the stock market went bad or their long-term care needs went way up or whatever the situation is. So it dramatically increased the chances of getting to the end without running out of money and without running out of cash flow.
Speaker 1 | 12:16.951
Okay. So before we get into what is a reverse mortgage, I really want you to break down what it is, what to avoid. If you're going to do this strategy, what to look for. Obviously, you could be somewhat biased because you represent an amazing company that people can actually work with you. So just so you know, we can have your information down below if someone wants to reach out to your team. But again, I want because sometimes I'll just put myself in the listener's shoes. Sometimes you can get the message that life insurance is a good thing, which it can be, but it might not be. And so it's like at the end of the day the last thing I want is someone going to a random insurance person and saying, hey, can you set so that's an example of the reverse mortgage that I want to like I have a feeling that not all reverse mortgages are created equal, and there's a reason for the negative stigma. So before that, you talked about there's actual a tax benefit to a reverse mortgage. What is that tax benefit? Because you said like you pay less in taxes if you have the strategy.
Speaker 0 | 13:18.902
So. In my situation, if you already have a reverse mortgage and you're right now dealing with a, I'm sorry, if you're already dealing with a mortgage, you already have a mortgage on your home when you reach 62, like I did. At that stage, you convert your reverse mortgage into a, or your forward mortgage that you got to make payments on every month into a reverse mortgage where you don't have to make payments. All you do is eliminate the payment and then interest continues to build. I have used that to be way above my standard deduction because some people just take the standard deduction. I'm way above that standard deduction when I take a reverse mortgage interest deduction every three or four years. Last year, for example, I personally saved $34,000 on my taxes.
Speaker 1 | 14:06.563
What is the reverse mortgage interest deduction?
Speaker 0 | 14:10.657
The reverse mortgage interest piles up. So let's say, for example, that my interest is $30,000 a year that I'd normally be making payments on. If I make zero payments, I get no deduction. I just take a standard deduction that year. But as it builds up in the third year, I'm close to $100,000 in interest. I can pull money out of any investment, any IRA, any short-term capital gain, whatever it may be, pay it into my reverse mortgage, and I immediately get a full deduction. of 100% of the interest because interest is paid first.
Speaker 1 | 14:44.887
Oh, interesting. Oh, that's really interesting. And then you technically could have access to that money.
Speaker 0 | 14:52.514
And then, yes, the next step is people say, well, that's great, but you just lost $100,000. No, you can pull that money back out tax-free whenever you want and re-borrow it, which you can't do with a regular mortgage without refinancing, and then put that money back into play as part of your cash flow or your investments, which is exactly what I did. And so I got that 1098, and now I can do it again in another three years. I wrote an article about that specifically for NASDAQ.com, four or five pages of exactly how that works. coordination with help from a tax attorney that specifically goes through how that works.
Speaker 1 | 15:26.110
Because you're either taking a standard deduction or you're kind of getting the best of both worlds. Okay. So before we get into what is a reverse mortgage, you talked about the three buckets, how you make your money, which is very, very important, especially if you're under the age of 40 or 50, making money really should be something that you focus on. And there's a lot of different ways that we could dive into that, but that's not what we're going to talk about today. Second thing is how you invest, where you save your money. Obviously, insurance, the market, real estate, all kinds of alternative investments. We're not going to talk about that. That's a big bucket. Trillions of dollars are in that bucket, and that's great. We're not going to talk about that, but that's where, candidly, most of my energy goes into on the show is talking about that second bucket. Third bucket is your primary residence most likely, and the typical advice is… You know, get to a place where your house is paid off. That's like the American dream. Like, you know, have a paid off home and then, you know, you don't have that mortgage. You get to live in that house and then you live off of mainly bucket two because the idea is you'd be stopping to work. And so bucket two would kind of keep you afloat. What you're saying is reverse mortgage is a tool not to as like the last. resort, not as a thing. I always think of the infomercials, almost like reverse mortgages. You have a ton of debt that you need to refinance and get reverse mortgage. So we got to get that stigma out. You're saying even if you're wealthy, even if you have millions and millions of dollars and sophisticated investments, you should look at reverse mortgage as a strategy to be more efficient. Those that watch this show know that efficiency for me is a no-brainer. If I can be more efficient, remove friction to get to where I want to go, why wouldn't I do that? And so with that, what is a reverse mortgage? If you can explain it like I'm a fourth grader and then how like, yeah, what is it? And then how how how does it work and like why does it work? Because I believe the government makes it possible. And again, I'm not a big fan of like government intervention, but I take advantage of tax strategies all the time. Whether I think they're smart or not, I'm going to take advantage of the tax strategy. And so it's one of those like the government, I believe, gives us certain things. We don't we may not agree with that, but I believe it's our our moral obligation to be as efficient as possible and use any type of ethical resources that we can use to make that possible. And that's very much how I view strategies like reverse mortgages.
Speaker 0 | 18:03.649
Well, that's so true, Caleb, even though people don't like the government. I have never seen anyone refuse Social Security or not sign up for Medicare if it's something that is part of their overall program. So the issue is this. Let's back up just a little bit before I explain exactly how the reverse mortgage works. You talked about efficiency. That is absolutely the critical issue that we talk about all the time. If I came to you, Caleb, and I said, I've got a million dollars. I want to put it all in Apple stock as my advisor because I think Apple stock is going to do really well. You don't have to be a financial advisor to say that's not a good idea to put all of your eggs in one basket, no matter how good Apple might be. And so the bottom line is, is that we know that we need to diversify our assets. However, if somebody comes to you and says, I've got a million dollar house and it's paid off, it's free and clear, everybody gets a pat on the back. Didn't you just put a million dollars into one? real estate stock? Is that a wise thing to do? Is that a smart thing to do? The answer is no, it's really not. It's not efficient. It's not smart. There's not a lot of wisdom involved there. But the reason that people pay off their mortgage is because they want a zero payment, which is a wise thing and without question should be done as you head into retirement. I am not a fan of anybody making a mortgage payment in retirement. 98% of the time, there are some reasons to not do that, not to have or to still have a mortgage payment, but most of the time, it doesn't make sense. So the only thing a reverse mortgage simply does is allows you to have a zero payment for the rest of your life. So you can borrow money and not pay it back until a year after you're dead or whenever you want to for tax purposes like I did last year. So how a reverse Mortgage Works is basically for two different groups of people. The first group of people is about 50% of the population and they have their house paid off. So we will give them somewhere between 30 to 50% of the value of their house and we'll send them tax-free checks every month, or we'll set up a line of credit that they pull money out as they need it, as they want it. So that's the first group of people. You've got your house paid off. You put too much money into that asset and you'd like to get some of it back. And you want to pull it out.
Speaker 1 | 20:30.011
What's the big difference between that and just a home equity that you could get?
Speaker 0 | 20:35.666
I hear that. all the time, hey, I can go down to the bank anytime I want and just set up a home equity loan. I can get money out. Home equity loans have three problems. The first one is if you pull $100,000 out, you got to pay back not only $100,000, but $150,000 or $180,000 or $200,000. So you haven't gained anything in cash flow. You're continuing to, you pull money out, but you got to put it back in. That's great if you're 30 years old. It's not great if you're 65 and headed for not working anymore. So the second reason is, You can't always get money. People forget that in 2009, after the crash, it was very difficult to get a home equity loan. Extremely difficult. And plus, the value of your house went down, so you weren't getting very much if you could get the loan. And the third scenario is, is that it's an umbrella that can be taken away when it starts to rain. Very few people realize that every home equity loan out there, including ours, does not a reverse, but a forward home equity loan at. movement at Wells Fargo, at anywhere, at the local bank, can be called any time when the value of your house goes down or something happens to your credit, or your wife dies, or your husband dies, or you get sick, or you lose your job, whatever the case may be. A reverse mortgage is a non-recourse loan and guarantees, because of the government, we'll come back to that, because of the government, you never have to pay it back no matter what, even if the value of your house goes down, even if you get sick, even if you live to be over 100. That is the difference between a home equity loan, which is great for young people, and we encourage the use of it. But it is not something that should be used for people my age, because for young people like yourself, what's the chance of your income going down? Are you dying in the next 30 years? Not very high. For my wife and I, very high that we're going to die at 65. We're going to die within the next 30 years, or our income is going to go down over the next 30 years, either because we aren't able to work or we don't want to work. So the issue is that a reverse mortgage line of credit guarantees that I have access to that money without paying it back, even if the market gets bad, and even if the value of the house goes down.
Speaker 1 | 22:44.548
You're essentially locking it in. Even though you may not need the money today, you're locking in your option that no matter what happens, that there's guarantees backed by the government, I believe. I believe you can explain how that works. and not just... the on a bank, you know, calling the loan or saying, hey, like, HELOCs normally are interest only until they're not. And so it's like, yeah, interest only until they call it. And with the reverse mortgage side, like you're essentially, you know, pretty much saying I have access to money and never have to go out of pocket to finance that. And so you're almost like you have access to money. It almost feels like you get your cake and eat it too. And in a little bit, it's not it's not free because obviously that interest is compounding and that we can talk about that. over time from a cash flow perspective, you have access to capital without having the future need to shell out money to make that right.
Speaker 0 | 23:38.882
Well, that's exactly correct. When you think about the, I mean, non-recourse is a technical term, but non-recourse simply means I'm not responsible for paying it back. When I signed my reverse mortgage with my wife three years ago, I signed a form that said release of personal liability. I've never owed over a half a million dollars to somebody or some entity and not being personally responsible for it. My house is responsible for it. And if my house isn't worth enough at the end, the U.S. government, through the program of an insurance program, which has never cost the taxpayers anything because it's an insurance program, but it is a government-backed insurance program that guarantees that no matter how long I live, no matter what the value of my house is, I can never leave a debt behind for my wife or for my kids or for my grandkids. That is an extreme amount of protection in my book. I call it the fairy godmother in the Cinderella book.
Speaker 1 | 24:27.789
So if you were, quote unquote underwater, it would not pass on to your, so the idea of being a burden to your, you know, family or, you know, estate is, is impossible with the reverse mortgage.
Speaker 0 | 24:41.138
Exactly correct. My uncle died in 2009, right when the crash happened. His house went down half in value. A dramatic difference. And fortunately, he had $300,000 left in other places, but the $50,000 that he's underwater on his reverse mortgage loan was completely wiped away with no tax consequences. And he didn't have to worry about it, nor did his heirs. Of course, he didn't have to worry about it. He was dead, but his heirs didn't have to worry about it. His grandchildren didn't have to worry about it. It was wiped out by the insurance program. And everybody that understands insurance, it's pretty clear that you don't have to, if you crack up your car and it's a $50,000 car, you don't have to come up with $50,000 because the insurance is going to take care of the shortfall to get you a new car. Same thing happens with the insurance program with the reverse mortgage. Now, that's where a lot of people say, well, there's smoke, there's fire. There's got to be a reason why people hate reverse mortgages. If you buy an uninsured reverse mortgage or you go with some private investor who is doing uh what's called an equity share loan that's a whole different deal we don't deal with any of those caleb those are things that are extremely dangerous and should be stayed away from and that will steal houses from widows and that will kill kick people out of the house when they're in their 80s and that will cause the um the all of the uh for the inheritance to go away on the house that's a whole different deal and not an insured government reverse mortgage that we deal with okay
Speaker 1 | 26:05.518
Let's break down what is reverse mortgage and the steps on how you would go about it. I believe you have to be a certain age, 62, if my memory serves me well. So for people like myself, we can take notes and maybe our parents or grandparents as an option. But I can plan in such a way that this is an option potentially. Who knows? But if you're someone that are in your 50s, 60s, 70s and have not utilized this, This is something that like get your notepad out because this could be something that you could utilize or look into that could be a game changer for your finances.
Speaker 0 | 26:42.648
Well, and young people like yourself, Caleb, you should not be spending a ton of money trying to pay off your house. Because if you spend all that money paying off your house, you cannot put money into life insurance. You cannot put money into annuities. You can't put money into AUM.
Speaker 1 | 26:54.840
That's why I like this concept. It's the same concept across the board. It's like the reason I'm a fan of the 30-year mortgage is the same reason why... I'm a fan of reverse mortgages in planning. It's the same concept. It's not like I'm 30 years, I believe in compound interest, but then I turn my brain off after that. It's like, no, I want to be consistent. I want to reduce risk, compound my money, increase cashflow. And reverse mortgage, when set up properly, does all three of those.
Speaker 0 | 27:23.346
Exactly. I learned about this when I was in my 40s. So I understood reverse mortgages in my 40s. So I put less money into bucket three into my house. So I now have hundreds of thousands of dollars into cash value in my life insurance that is immediately accessible to me, even though I don't have my house paid off. But I'm better off cash flow-wise, I'm better off tax-wise, and I'm better off net worth-wise because I did not put all the money into the wrong bucket when I was in my 40s and my 50s. Now, once you get to 62, and in many states at 55, there's proprietary reverse mortgages that are outside of the government program that are still non-recourse. So in some states you can do it at 55, but everybody can do it at 62 when in all 50 states with the home equity conversion mortgage, which is the government program, and it serves houses up to 1.2 million. So most people are able then to do it at that point. So option A is what we already talked about. You get your house paid off, you can pull money out, either in the form of a line of credit or monthly checks. However, the people that can benefit the most are the people that are still making a mortgage payment that should not be. And I... probably told you this before, but many years ago, I was snoring really loud and my wife elbowed me really hard in my ribs. And I woke up in the middle of the night and I said, over 62, 50% equity, still making a mortgage payment. And she said, you are sick. All you do is think about reverse mortgages. Well, that's what you call top of mind when you wake up in the middle of the night. If you're over 62 and you have more than 50% equity and you're still making a mortgage payment, you have to question why you're still sending money to that place. It's not efficient. and you can send money there if you wish, but does that make sense? Those are the people that we want to get to first, because if you're over 62 and you're still making a mortgage payment when you have more than enough equity in your house, why are you doing that? What is the purpose of that money? You look at the purpose of what you send your IRA, you look at the purpose of what you're sending your life insurance, annuities, everything else. Why are you sending money there when you don't have to? Because if you got a letter in the mail that said, Congratulations, you've reached the age of 62. You've got more than enough equity in your house. Your mortgage payment is now optional for the rest of your life. Would you really continue to send money there? I mean, you'd think about it. You might think it's, as you mentioned earlier, this might be a scam, but you'd think about it and say, should I send money for the benefit of myself, my wife, my kids, my grandkids? Should I really keep sending money there? And you'd reevaluate whether or not you should send money to that account. That's what we look at and that you can prove over and over in software. Why are you continuing to send money to the place where it really doesn't make sense? And that is the biggest number of people that we can help right now. And it also helps advisors because now you can put money like I have into life insurance, into long-term care insurance, into AUM.
Speaker 1 | 30:08.576
Into investing. You can invest. Exactly. So let's talk about, okay, so if you don't. There's no such thing as a free lunch. So if I don't, if I can stop my payments, that's great. I have that cash flow that I can invest, that I can spend. But what's happening? The reverse mortgage side still needs to financially make sense for the other parties. So talk to me about how that works.
Speaker 0 | 30:32.666
Yes. So everything in life is a trade-off. If you decide to get married, that means that you're not in the dating scene anymore. Maybe a silly scenario, but most people that are married, their spouse really doesn't want them to continue to date. So everything is a trade-off in whatever we do. We give money to the car dealer so we can have a car instead of a bicycle. When you go into a reverse mortgage, that may seem like a silly comparison, but everybody is hung up and in love with their home equity. Well, just a minute. If I give up some home equity, in the last three years, Caleb, I've given up $100,000 in home equity in the form of interest. that I am giving to the reverse mortgage company. I am happy to give that up because I've gained more in bucket two than what I've lost in bucket three. So even though I've lost technically a hundred thousand dollars, I didn't lose it. I traded it for cash flow so I could send more money to my advisor and less money to my house. So I have less equity but I have more cash. That is the trade-off. So, you know, we don't do this for free. We're a mortgage company. We're in the business of lending money and collecting interest. We are not in the business of taking people's houses away. We're not landlords. We're lenders. So we are lending money, knowing that we're going to get not only our money back with a government-insured program, but we're also going to get interest back. So all of that's going to be coming back to us. And that is the rent, so to speak, that you pay on your money so you can earn more rent elsewhere. Everybody understands that you might have to pay interest on a rental property. But you do that because you can collect rents from the people that are living in the house.
Speaker 1 | 32:14.168
And so let's just do some simple math here. So let's say I have a million dollar home. Half of it's paid off. I'm still making payments. I'm over 62. Do a reverse mortgage, stop payments. And like, let's just say I live for 30 years, you know, and when I pass away, the interest. you know, that accrued is more than the house value. You're saying that insurance would kick in and my heirs would not have the house, but would also not have any debts. Is that correct?
Speaker 0 | 32:54.931
Well, the heirs would still get the house. They would inherit the house with no equity, and they'd get a huge tax deduction because of the loss factor, because there's a lot of interest that wasn't paid. So there's only two things that can happen. You kind of explain my situation, I have about a half a million dollars. And by the time I'm in my nineties, if I make no payments or if I make payments and pull the money back out, I will owe $3 million. Theoretically, my house will be worth $5 million when I'm in my nineties. Will that happen? Nobody knows. Nobody knows what my house is worth next year, say nothing about 30 years into the future. But when at that point, my wife and I are gone, the kids inherit the house. If it's worth $5 million and I owe $3 million, they sell the house and take the $2 million and divide it up. If my house is only worth $2 million and I owe $3 million, the difference is forgiven with no tax consequences. The kids get nothing, but they get a tax deduction on the interest that I did not pay during life. So they will still inherit the house. So they could refinance the house and keep it.
Speaker 1 | 33:51.419
They get the, even if they made a profit, would that tax benefit still benefit them?
Speaker 0 | 33:59.364
It would. So if they sell it, first of all, they get a step up in basis, but let's say they... get an inherited IRA or they have their own IRAs or they want to do Roth conversions, that year they get a tax deduction when they sell my house of the interest that I never paid during my lifetime.
Speaker 1 | 34:13.946
Yeah. I feel like nobody's talking about that. Even when we first talked, Harlan, I feel like this is something that you've been... When we first talked that this wasn't even a talking point four or five years ago.
Speaker 0 | 34:24.618
It wasn't. I didn't understand all the tax benefits. I understood the cashflow benefits and that's enough. The tax benefits are frosting on the cake. And that's the extra that you're getting over and above the fact that not only do you not have to make a payment, but oh, yeah, you get this too. And that's where people are missing. What about the tax play? Because, you know, I'm a big fan of seven habits of highly effective people. And one of the key habits is begin with the end in mind. So a lot of people say reverse mortgage is great for the old people, but yeah, not so good for the kids. At the end, that's when it's a problem. No, it's not. It's actually better at the end than it was in the beginning.
Speaker 1 | 35:02.949
For the consumer, was it better to do reverse mortgages with lower interest rate because they could potentially take out more? How does interest rates affect? Is it like you lock it in for life whenever you start or does it change? How does interest rates affect reverse mortgage?
Speaker 0 | 35:22.516
Well, you can do either. But, you know, when it comes down to better, it depends on where you're going. So when somebody says, you know, should I get a reverse mortgage now? Because that's great when rates were 3%, but now it's not as good. All ships rise with the tide and there's different uses. I'm glad that interest rates went up. I did not take a fixed rate on purpose. I wanted an adjustable rate because I wanted a bigger tax benefit, and my goal is not to die with the most equity. My goal is to have the most money to spend while I'm alive, the most money to give away, and the most money to help my kids between now and when I leave the earth. And so I don't care what the interest rate is. I don't care if it goes up or down, but if it goes up, I get a bigger tax benefit, and that means that I'm in a better position with all of my other investments. Do I get as much money if I'm taking out a loan now? No, the interest rates, the higher interest rates have dropped the loan to value. So you have to have more equity in your house. But most people my age have a lot of equity. Anyhow, don't forget the value of our houses went up a lot in the last five years. So even though the loan to value has dropped, the houses are worth a lot more. So in all of the scenarios together, interest rate is not a big factor for reverse mortgages because the payment is always zero. And that is the overwhelming aspect and the most important feature of a reverse mortgage. Payment's zero.
Speaker 1 | 36:41.120
If you have a variable rate today, could you lock it into fixed in the future if you wanted?
Speaker 0 | 36:47.288
Yes. Reverse mortgages can be refinanced. They can be paid off. Just like any regular mortgage, it's not a permanent decision. You can do whatever you want as scenarios change. You can pay more down. You can pull more back out depending upon what happens, which we have no idea what the economy is going to be like in a year or two or five, but it's flexible that you can decide how much equity you want to trade for cash.
Speaker 1 | 37:13.836
So if we play a scenario, obviously you're someone that's putting that money in bucket two. I would imagine lots of people are probably not putting money in bucket two. They're just spending like their quality of life is going up, which indirectly helps bucket two because it might mean that they're spending like they have to spend less in bucket two because the money that they were putting towards their mortgage now is being spent. And so that is there can be some guilt with that because it's like at the end of the day, you're living more today. But in this in how we've been trained, it's like I'm getting giving like I'm creating an extra burden because if I didn't do this, my kids would end up having more money. Well, this is where life insurance or reverse mortgages come in because if someone had permanent death benefit not by term and invested difference but a permanent death benefit this could this could be an example just one of the many examples of unlocking other assets whereas like you have permanent life insurance you have cash value you can utilize and then someone would be like why i don't care about the death benefit well number one that you should care because from an estate standpoint i mean i'm sure you have millions and millions of dollars of death benefit which is going to be like your family your kids are going to much rather like the money option because if they really were tied to the house they could they could pay the difference on the house and keep the house but they have the options not to and and you're giving them more options but it gives you the ability to do strategies like the reverse mortgage like that's a that's a classic example how life insurance unlocks other assets and and gives you the ability to spend more today by and and not disheriting your your their future because the the death benefit is playing a role. And so it's like the... Person A doesn't have life insurance, doesn't do reverse mortgage. They're doing this strategy. Person B has life insurance as a part of their portfolio, allows them to have the reverse mortgage. The kids get more and you spend more. It sounds too good to be true, but those are the kind of things with proper planning that you have to look at when you look at how all assets fit together.
Speaker 0 | 39:23.955
Everybody knows, Caleb, that if you're going from point A to point B on a trip, you can review. the situation with Google Maps, you can review the situation with a regular map. There is always an optimal way to get there. And you could use a bicycle. You could walk. You could use a car.
Speaker 1 | 39:42.713
You could use an airplane. Yeah, I struggle with everybody because when you start reading Google, YouTube comments, you realize not everyone is on the same page. But I would assume that most people would get the idea. If you're going to go somewhere, look at the map, and there's options, do the most efficient, right? If something is going to get me there 40 minutes, why would I take the 50 minutes other than the fact that I would want the nice scenic drive? If my goal is to get to a destination the fastest, I'm going to pick the fastest route.
Speaker 0 | 40:09.498
Yes. I always joke, I used to tell people, don't get cash value life insurance because you should just buy term and invest the difference. I was so narrow-minded and so misinformed that I'm embarrassed about my former self 30 years ago. Because now, as you mentioned, I have millions in death benefit and my kids could care less about how much my house is worth. Because they're going to get way more in death benefit of life insurance. And I just helped my son. four or five years ago during COVID buy a house because they had another kid on the way and there was a lot going on with the COVID stuff by borrowing money from my life insurance policy to give him so he could immediately get a house. So I can even use that money now. I'm the best life insurance salesperson you're ever going to run into who doesn't get a commission and is not licensed because I understand fundamentally the difference between sending money to that place instead of sending money to my house because of not only what benefits me. but also what will benefit my children and my grandchildren going forward. The money in the house is a wild card. There might be some there. There might not be. I don't care. That's not the important part of my inheritance. And the other factor is there's some people that are in a situation where, yeah, they can't invest money because they stopped working. I'm still working, so I can continue to send money to bucket two. But some people cannot put more money in the bucket two. All they can do is eliminate their payment. Now, there's two ways to look at that. Are they going to burn up money for their kids? Well, yes. The alternative is to die early. And if you ask any kid, do you want your parents to die early so you can get a bigger inheritance? Well, if the kids say yes, then you want to get new kids or new heirs. So it's silly to think, well, I don't want to spend this money because I want to give more to my kids. At least you won't be a burden to your kids and you'll be in a better position to enjoy life. So the second situation is what people are always missing. I was just talking to an advisor last week and he said, I have to figure out a way, Harlan, to get to $6,000 a month for this client, and there just isn't enough money to get him there. And I said, how much of that $6,000 is a mortgage payment? $2,500. If I just eliminate the $2,500, the nut to crack goes down to $3,500, and it's easy for him to supply that client with $3,500 a month. It's not easy for him to give him $6,000. It takes all the pressure off from bucket two. when you're eliminating the mortgage payment that's being sent to the wrong place. So yes, that client will end up with less equity, but will probably never run out of money in bucket two because they're not depleting the asset that was set aside for that purpose. So yes, not everybody can invest because they're not still working like I am. But if you're not, at least it takes the pressure off of what you're dealing with there.
Speaker 1 | 42:56.126
And retirement should be called future cashflow planning. And so at the end of the day, you should be looking at current. future cash flow. And then if you really want to get technical, the legacy cash flow. And that's, those are the three scenarios. But I find that a lot of, a lot of, a lot of retirees are not thinking with the end in mind when it, like they're, they're saving, they're investing, but they're not, they're not doing it for, uh, for like a lot of times they're, the education's not there to say like, I'm going to, I'm going to do this to translate this into maximizing income, reducing risk. Cause those, those are the things that should always be in every good planner's mind is how can I increase cash flow reducing risk while maintaining an increasing legacy. And if you can do all three of those, that's like every decision has a variable. And what you're saying is a reverse mortgage, when set up properly, when not looked at it as the last resort can help in all three of those areas. One of the biggest, I think, pushbacks I would have to reverse mortgage is what if you're going to move? So what if you're someone who's like, you know, they're like, I'm not sure I might move back to my kids. I'm 60. I love Wisconsin now, but it's like Wisconsin gets cold, gets super cold. It gets super cold. What if what if I what if I want to go to Arizona or Florida? Could having a reverse mortgage get me in trouble? Because, again, I believe the insurance only kicks in if I die. Is has there been horror stories of like I've started this and I've regretted, you know, so talk to me about talk to me about that and also talk to me about the. times when 62 you shouldn't get a reverse mortgage because i'm pretty sure you said 98 of people should do that that's a big percentage but you're leaving two percent available for the person that maybe shouldn't. So I'm kind of allowing you to speak to that. And then also the question about moving.
Speaker 0 | 44:51.480
Well, the rule of thumb is three years. If you're going to be in a place for less than three years, the cost of setting it up, just like the cost of setting a permanent life insurance policy, if you only need a term policy, or if you only need a life insurance policy for three years, you get a term policy because it's for a specific purpose. The same thing with a reverse mortgage. If you're only going to be in a place for three years and you're just waiting for your last kid to graduate from high school or the last granddaughter or whatever, you should wait until you get there. But if you're going to be in a place for more than three years, but you probably will move at some point in the future, it still makes sense because remember, you still have that equity. You're putting less money into bucket three, and you're then putting more money or pulling less money out of bucket two. It still makes sense to do. It's just like a 30-year mortgage. Very few people have it. a 30-year mortgage all the way to the end. They're refinancing it. They're getting a different house, whatever. You can do the same thing with a reverse mortgage. Your feet are nailed to the floor.
Speaker 1 | 45:44.561
So three years is the key. It's like if you know you're going to stay in a place more than three years, reverse mortgage is a strategy. But if you know you're going to move in a year and a half, don't do the reverse mortgage because there's just going to be a lot of cost associated with that. What are the costs? Is it like closing? How does a reverse mortgage break down?
Speaker 0 | 46:04.094
All the costs, Caleb, are the same as any other regular mortgage. The difference is the mortgage insurance that we talked about earlier, the fairy godmother. You got to pay for the fairy godmother in this story. And the fairy godmother is 2% of the value of your house. You got a million dollar house, you pay $20,000. You got a half million dollar house, you're paying $10,000. You don't pay that. It comes out of your equity, but then it becomes a payment if you move.
Speaker 1 | 46:24.235
I understand.
Speaker 0 | 46:25.142
It's on your numbers. Kind of like the back end load of a mutual fund or the surrender fee in a life insurance policy. You don't want to get out of it early if it doesn't make sense. And so that's there, that's sitting there. However, if you're in a situation of a declining market and you don't know if you're going to stay, but you're not going to stay more than three years, I want to clarify something you mentioned. The insurance kicks in even if you don't die. Because we had clients that had to move after the 2008 crash. I had a client that had to move from Wisconsin to Arizona because of health reasons. And they were upside down. Not only did they not have to pay the upside down part. but they were able to buy a cheaper house in Arizona, which had went down further with a reverse mortgage for purchase.
Speaker 1 | 47:05.829
And they walked away from the house in Wisconsin without It's like you're putting a put option on your home value.
Speaker 0 | 47:11.946
Absolutely.
Speaker 1 | 47:12.625
So you don't have to die. So you could have a reverse mortgage while you're alive, get out of it and not have to go out of pocket if you're upside down.
Speaker 0 | 47:22.375
Exactly correct. Because remember, you sign a form that says release of personal liability. You're not personally liable for it. The house is, number one, if the house doesn't have... enough money, then it goes to the responsibility of the insurance. Wow. Again, it sounds too good to be true, but that's the purpose of insurance.
Speaker 1 | 47:38.465
Can you have a reverse mortgage on multiple properties?
Speaker 0 | 47:41.426
Unfortunately, no. Only on your primary residence. The only way you can have multiple properties is if you're unmarried and that you're... partner can have one. And my wife suggested maybe we should get a divorce so she could have a reverse mortgage on the property in Florida. But fortunately, that hasn't happened after that.
Speaker 1 | 47:57.594
That might be more last resort kind of strategy. That's definitely last resort. Can you imagine if that was a chapter number 13 in your book? Like, hey, if you really want to take this to the next level, here's how you do this.
Speaker 0 | 48:14.575
Yes, that's not recommended. No,
Speaker 1 | 48:16.466
you may lose some tax benefits in the process, we'd have to run a calculation and see the pros and cons. Don't recommend it. I'm not endorsing that. I just love creative strategies. That's very interesting.
Speaker 0 | 48:29.119
Yes. But the bottom line coming back to what you're saying is that it always makes sense once you're past 62, almost always, nothing is always and never, but to do a reverse mortgage and you can always make optional payments if you wish. so you can treat it. reverse mortgage, just like a forward mortgage. Somebody says, I just like forward mortgages because I don't want to lose equity. Okay. Then just, you get a statement every month.
Speaker 1 | 48:52.370
And is it one of those things where what's the interest rate right now? Is it six, six, 7%?
Speaker 0 | 48:57.936
It's six and a half percent. It tracks with the 10 year treasury. So it's the same as a 30 year. It's about the same as a 30 year fixed.
Speaker 1 | 49:05.015
Assume if it's fixed, six, six and a half percent. And I would, it's my understanding that even no matter what option A or option B, whether you get money out or you stop your... your payments, if you put extra in, you have access to, to, to that, like a HELOC, I would imagine. Is that correct? So it would be like, it would be like, why in this case scenario, why would now you have a built in six and a half percent. high yield savings account with no risk. Like literally no risk because you're eliminating some of the downside. And so in the past, we've talked about velocity banking. Velocity banking is using a forward HELOC. There can be some pros to it, but there's a lot of risk, as you can imagine, of telling someone to put all their money in a HELOC that something can go away tomorrow. Like there's, you know, interest rates and like I would never tell someone to refinance a 30-year, you know mortgage into something that's that's like a forward-facing high interest rate HELOC but like you could you can see the benefit of like putting all your money there and and like there's some benefits to that you can take some of the good of velocity banking use it in your reverse mortgage if you'd like and if you have money and you're like where should I put it I could put in my how you the same account that's gonna earn 4% or you could put it in your your reverse mortgage and And it's an equivalent of you making additional 6.5%, even though you're not as worried about the you wouldn't want to do that if you're underwater, right? But I'm just talking out loud here and around like you could do that and you still have access to that whenever you need it.
Speaker 0 | 50:45.180
Well, that's exactly right, Caleb. It's anybody that has money just laying around that's earning 0% or 2% or 4%, put it against your reverse mortgage and then just pull it out when you need it and you want to reposition it. Uh, it is foolish to, because you know, you have absolute access to it. Uh, that, that is always going to be there no matter what, unless of course, as you mentioned, you're underwater, then you don't want to put money into something that cannot be taken out if you die unexpectedly.
Speaker 1 | 51:11.480
Yeah. Okay. So Harlan, what, what's the next step for people? There's two types of people listening to this. There's advisors and they, I believe in the past, I know I'm putting you on the spot, but there's a way for them to... talk to your team and like, see, you guys will actually run a case study for them? Yeah. That's something you guys are willing to do?
Speaker 0 | 51:32.823
Absolutely. The first thing for any advisor is don't believe everything you've heard in the last few minutes that we've been talking. Prove it to yourself. Prove it for what should be in your situation. That's what I did before I ever sold one reverse mortgage, before I ever recommended life insurance to anybody. I went and got my own and went through all the thought process. So prove it to yourself, either with your own personal situation, your parents' situation, or one of the clients' situation, with no personal information, just we'll give you a case study sheet. You fill out bucket one, two, and three. We come back to you and say, hey, this is how it works. These are the costs. This is what it looks like 10 years from now, 20 years from now, whatever. If you are dealing with clients, you owe it to those clients to make sure that this is done if you're a fiduciary, just like you owe it to them to investigate alternative investments or other stocks, mutual funds, whatever.
Speaker 1 | 52:27.145
And if you're listening to this and you're actually interested in yourself, we'll also have a link for you to click so you can talk to someone directly about your situation. But you were going to say something, Harlan?
Speaker 0 | 52:37.938
Yes. If you're a client, if you are a senior approaching retirement or you're already in retirement, you owe it to your kids and your grandkids to check this out because you can have a better retirement. You can have a better long-term plan if this is factored in. And you can say, well, I don't need a reverse mortgage. That's not the point. People don't need social security, but they still take it. You don't need a car. You can ride around a bicycle or a motorcycle, but it makes more sense to have a car, especially in the rain. The bottom line is that you should check it out to find out what your options are.
Speaker 1 | 53:12.095
Yeah. You don't need to fly. You choose to fly because it's a lot of times cheaper and faster, but you can easily, we're not telling you, you have to fly. airplanes you can drive same same thing that goes this like you it's not like you you're gonna run out of money but if there was a better way wouldn't you want that i i resonate with that i believe majority of people that listen to this watch this uh resonate with that that mentality as well um and then harlan i would love to almost do a part two where we actually go through a case study maybe we go through like three three people uh someone on the younger end someone on the older end, maybe someone in the middle, like, you know, 65. And you show like this is scenario A, scenario B. This is with the reverse mortgage and without the reverse mortgage. And I know like I can tell you right now that that video will be epic because you can show firsthand the numbers. And so I'm requesting that we make that happen. And I really appreciate this conversation. And I hope that this unlocks how we think and allows advisors and people to at least pursue it for themselves, look at numbers. And yeah. I appreciate you taking time to be with us today.
Speaker 0 | 54:22.289
If we can change one life, great. If we can change thousands of lives, that's okay too. But if we can change one life, it was worth us talking today.
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