The Truth About Reverse Mortgages – Part 2

Speakers: Jon Gay, Bruce Hosler, & Rob Kanyur

[Music Playing]

Jon Gay (00:04):

Welcome back to Protecting and Preserving Wealth. I’m Jon Jag Gay, I’m joined as always by Bruce Hosler of Hosler Wealth Management for part two of our series on reverse mortgages. Bruce, do you want to welcome back and reintroduce our special guest?

Bruce Hosler (00:16):

Yes, folks, I’m very happy and honored to have my good friend, Rob Kanyur with Fairway Mortgage with us. He’s a reverse mortgage specialist, and Rob, welcome. Thank you for joining us today with your expertise.

Rob Kanyur (00:29):

Well, thank you Bruce. Glad to be here.

Jon Gay (00:31):

So, at the end of part one, we teased this, that we were going to pick up here with the tax question. Bruce, I know you’re going to ask Rob about taxes, it’s your wheelhouse, so the floor is yours.

Bruce Hosler (00:42):

Alright, so as a tax guy, I’m always interested in the tax angle with these reverse mortgages. Now, let’s talk about paying off a reverse mortgage loan, Rob, and primarily, normally that’ll be a reverse mortgage line of credit, I know. But generally, this is only done with a reverse mortgage line of credit.

So, tell us about the reverse mortgage line of credit. Let’s just talk about that for a second, Rob. How that’s a little different than the traditional HECM (Home Equity Conversion Mortgage) reverse mortgage.

Rob Kanyur (01:09):

Sure, Bruce. I mean, the line of credit is kind of the sizzle on the steak or the really sexy part of a reverse mortgage, the variable option. There is a fixed option as well that does not offer the growing line of credit.

So, 99.9% of our clients that consider or do a reverse mortgage are going to pick the variable line of credit option. It grows adjacent to the compounding interest on the loan balance, and they can pull that money tax-free at any point in time if they want to pay back into it.

It’s much like a savings account on steroids. So, it’s growing at a rate based on the initial rate of the reverse mortgage, which right now, is somewhere around give or take, 7% growth, guaranteed low risk by FHA.

Bruce Hosler (01:54):

So, let’s just talk about that. What you’re talking about growing is actually the line of credit grows, not the loan balance. So, we’re talking about every year, even if we’re not pulling it out, that line of credit, the balance or the availability, the credit line itself is growing each year. Is that correct, Rob?

Rob Kanyur (02:12):

Yeah, so the payments are optional with a reverse mortgage. So, if they want to make a payment, they can, there’s no penalty to do that. Some of our clients will do that. And when they make a payment, then dollar for dollar, it becomes available on the line of credit. So, the line of credit is growing and adjacent to the compounding interest on the loan balance.

It’s like a credit card, so it gives them more available credit. Why they don’t want to take a regular home equity line of credit out is because when you borrow against a home equity line of credit, you have a payment.

Bruce Hosler (02:43):

Yeah, you have to make payments.

Rob Kanyur (02:44):

You have a first mortgage payment of $1,200 a month so you want cash out of your property. So, let’s add a second payment of $200 a month. Oh, it’s interest only — well, yeah, it’s interest only but you still have a payment. So, you’ve gone from one payment when you should have no payments to two payments.

And the thing that’s really concerning about a traditional line of credit in retirement, not only having a payment, but they can call that loan payable to due at any point in time. They can freeze it, they can reduce it, and then when you really need it, they kick you while you’re down and you don’t have access to it.

In addition to the fact that it recasts after 10 years and in year 11 it goes to a principal and interest payment. So, it is very dangerous and risky for someone to take out a HELOC. Yeah, it costs less, but you’re getting very little benefit from it. It has very limited usage.

Whereas that line of credit that is associated with the reverse mortgage is growing, the line of credit growth can exceed the value of the property in some cases to where they can pull that money out, as you mentioned before with some of the clients, is to buy a new vehicle, to make improvements on the home, to take a vacation like my parents did. That line of credit growth is so powerful and very few people know about it.

Bruce Hosler (04:03):

I want to just follow up on my tax angle here because this is one that I get into with clients, is if we have a reverse mortgage line of credit, and I’m going to talk about a volatility protection strategy using the reverse mortgage line of credit.

But if we borrow on it or let’s say we take some money on it and the interest accrues on that, the standard deduction doesn’t let most people, even if they have a forward looking mortgage, right off the mortgage interest because the standard deduction is greater than the mortgage, and there’s no other really deductions left, and so they’re left without really using an itemized deduction.

If we let our reverse mortgage line of credit accrue for five or six or seven or eight years, and then all of a sudden, we want to pay down $50,000 or $100,000 so we can get this big deduction and maybe use the deduction to offset a Roth conversion or something else like that, the reverse mortgage is a perfect way to do that.

Now, there’s a little bit of hair on the transaction though, Rob, and I want to talk about that. It’s not just the interest we have to pay off, we have the mortgage insurance premium we have to pay off too. Talk to my listeners about that.

Rob Kanyur (05:11):

If someone is purchasing a home, they can use reverse mortgage, that was implemented in 2009 referred to as, correct me if I’m wrong, acquisition indebtedness.

Bruce Hosler (05:20):

Yes, that’s the term.

Rob Kanyur (05:21):

So, we had a case study of a retired airline pilot moving from Dallas to Denver. The number one reason people move in retirement is to be closer to their kids and grandkids. They were going to purchase a home for cash $500,000 because he had a net worth over $3 million.

And his financial advisor’s like, “Wait, well, time out, pump the brakes on that. You don’t want to deplete the portfolio, pay cash and pour all that money into an illiquid asset.” So, they introduced the concept of the reverse mortgage to him and his wife, and he balked at it until they explained what you were explaining about the potential tax advantages.

So, we were able to obtain two goals by them purchasing with a reverse mortgage. Number one, they were able to purchase a $750,000 house by putting $500,000 down, and then FHA coming in with the other $250,000, and put them in the house that they wanted that was closer to the grandkids and a nicer house.

And then we met with their CPA and financial advisor to talk to them about the tax advantages, which is a tax stacking strategy where every year, they’re going to accumulate $15,000 to $20,000 of interest, and then after year three or four, they call you and say, “Hey, I want to make a …”

Bruce Hosler (06:32):

Payment.

Rob Kanyur (06:33):

It’s a coordinated strategy where they’re talking to you and we’re walking them through that where they make a $60.000 to $100,000 payment on the reverse mortgage to pay the balances down, and then dollar for dollar, the funds become available on the HECM reverse mortgage line of credit.

There is a waterfall effect as well though. As you mentioned, they have to pay back the mortgage insurance first, and then they have to pay back the interest, and then it goes towards the principal. So, on $100,000, they could have $80,000 available, accessible to them on the line of credit once they make a payment.

So, that’s a very powerful, powerful tool that Dr. Barry Sacks, the top retirement tax attorney in the nation who’s been studying taxes in retirement for the last 50 years, explains that in a white paper; he has a tax stacking strategy.

That airline pilot and his wife, not only got into the home that they wanted to be in near the grandkids and kids, but they’re going to save thousands of dollars in taxes by using the strategy with the reverse mortgage.

Bruce Hosler (07:54):

One thing you kind of mentioned there, and you didn’t really say it, but I call it a “reverse for purchase.” And that is I sometimes have clients that are going to buy another home.

Maybe they’re moving closer to the kids, and they’re thinking like, “Hey, I’m just going to pay all cash.” And I’m like time out, wait a minute, we can use a reverse for purchase and put 50, 60% down, and you can buy your new home for a lot less of your portfolio, keeping your other nest egg liquid and available for spending to visit the kids or travel or do whatever, and you don’t have any payments.

It’s like you own the home free and clear as far as living without the cash flow and reverse for purchase is a very, very popular item when I talk to clients. And we can use a reverse mortgage line of credit for a reverse for purchase. Is that correct, Rob?

Rob Kanyur (08:45):

So, we could use a reverse mortgage for purchase. All the money that FHA is giving the homeowner with a reverse for purchase is going towards the purchase of the home in the form of a lump sum. So, the line of credit is at zero with a reverse for purchase.

But then after 2, 3, 4 years, they contact you on their annual review and say, “Hey, let’s look at paying down the balance on your reverse mortgage so that we can in turn, build that line of credit that can be accessible at a later time, and you pull it out tax-free.”

So, yeah, they might pull money out from you and be 1099 when they make a payment on the reverse mortgage. But when you make a payment on the reverse mortgage, 1098 will drop down for the reverse mortgage servicer negating most of that tax event, and then that money becomes available on the reverse mortgage line of credit where down the road, they can pull that money back out tax-free.

Bruce Hosler (09:42):

Ooh, that’s music to my ears, Rob, tax-free.

Jon Gay (09:45):

You know how to talk to a guy, Rob.

Bruce Hosler (09:47):

Pulling money out tax-free, now you just got me … man, my palms are all sweaty, I’m telling you. So, the other topic on this is the reverse mortgage line of credit. So, we set up the reverse mortgage line of credit, we’ve got a big line of credit, let’s say that’s available, but the homeowner doesn’t want to use it necessarily.

So, they have that available in case of emergencies. Let me just explain one as a financial advisor that we run into, and what I’m talking about is the volatility protection strategy with a reverse mortgage line of credit.

Stock market does a “2022,” it does a crash, it drops 20%. We don’t want to be selling stocks inside of our IRA for a distribution, we don’t want to be selling them inside of our taxable trust or a brokerage account because they’re selling at a loss, so what do we do?

We go to the reverse mortgage line of credit, we take that tax-free distribution from the line of credit for our living, now our income is very low. We can do a Roth conversion that year while the income is low, not recognizing very much income, and we let the market come back up in the next year or two. Maybe we take a year or two of income out of that reverse mortgage line of credit.

Now, our market’s back up, we can sell positions, we can pay back our line of credit if we need to. and “reload our gun,” so we’re ready again for another correction in the market. This is a beautiful vehicle for volatility in the market, and I’m sure you’ve had some experience with that.

Rob Kanyur (11:22):

A lot. In the 26 years of lending I’ve been doing (this), specializing in this product for the last 10 years, and with our clientele, which is surpassing 400 clients now. We’re reaching critical mass with this reverse mortgage.

It’s taken some time because there’s an education piece there, whereas many of our clients are massive, fluent, higher net worth clients because they understand cash flow in retirement, they understand tax-free income in retirement, they understand legacy building in retirement, and that is very important.

And portfolio preservation, as you mentioned, those are the four main critical parts, and so it’s really gaining a lot of steam. There was a client last year, Bruce, in Beverly Hills with a net worth of $45 million that took out a reverse mortgage, and all of his friends and colleagues are like, “What the heck are you doing?”

He’s like, “Why wouldn’t I leverage a portion of my home? It’s an illiquid asset.” I used that money, $280,000, to offset capital gains on other properties he owns. So, that is how it is utilized as a coordinated strategy.

So, I say the majority of people still think it’s a loan of last resort that you take out after you’re out of money, you sold the last piece of furniture on eBay, you’ve had the last garage sale, you’ve borrowed money from the kids and grandkids, and you’re completely out of money in debt, and then you come talk to Bruce and Rob about doing a reverse mortgage.

Studies and research and you know more than I do, as much as I do, that taking this out earlier at age 62, rather than later at age 82, is going to improve your overall retirement situation. Much like it did with my very own parents back in 2016. They met all five of the objectives by doing the reverse mortgage when they didn’t need to do it.

Jon Gay (13:20):

Rob, many people have saved large values in the equity in their home, and that equity is largely unavailable to the property owners for any use or benefit. How can the reverse mortgage line of credit make that equity available for use without the homeowner having to sell the home, move or affect the fair market value of their home?

Rob Kanyur (13:36):

Great question, Jon. That’s referred to as aging in place, which is consisting of about 80% of our clientele right now. They want to remain in their home, maybe they’ve lost a spouse and their income has gone down by 50%. Now, it’s a larger home on a larger lot, maintenance and upkeep is expensive.

Bruce mentioned the cost of homeowner’s insurance has literally doubled over the last couple of years. Property taxes are increasing; homeowner’s association dues are increasing as well. So, what they’re able to do is harness — and by the way, across the nation, there’s over $15 trillion worth of untapped equity in seniors’ homes right now that they’re not utilizing.

So, by turning on bucket number three, which is home equity, $15 trillion worth of home equity, they’re able to extract or convert a portion of that equity anywhere from 40% to 60% depending on the appraised value and the age of the homeowner, and convert that into tax-free cash to allow them to age in place and be able to literally (spoke to a client a couple weeks ago from Tucson) have peace of mind and the ability to sleep at night because now, they don’t have to worry about running out of money before the end of the month.

Bruce Hosler (14:50):

It’s a great emergency source for income and I love the idea that it’s tax-free. So, even if they don’t have a lot of money, it doesn’t make their Medicare subject to IRMAA penalties or push them into a higher tax bracket. So, they’re able to stay in that low tax bracket because the distributions from the loan are income tax-free.

Guys, when I wrote my book, Moving to Tax-Free, I talked about the costs, the risks, and the considerations for reverse mortgages. And these loans are not for everyone. There are costs and risks and considerations that every homeowner has to consider when they’re looking at this before they secure a reverse mortgage.

And we’re going to include some notes from my book in the cost and risks consideration in the show notes (Jon will take care of that for us). But I just want to identify some of the big ones in our conversation and just have a short discussion on them today.

So, loan origination fees, those are a little higher than on a normal mortgage that some of the friction of the cost of getting into one of these loans, but the ability to access your equity, that’s kind of the price to get into it, right, Rob?

Rob Kanyur (15:56):

Correct. As mentioned before, the good news about this loan is it’s safe and secure and insured by FHA, and the bad news about this loan is it’s safe and secure and insured by FHA (laughs). So, the cost versus benefit really comes into play here to where if this is going to be their forever home, they are going to incur some additional costs because this is a non-recourse loan with no personal liability, meaning they can never owe more than the house is worth.

So, if they’re upside down at the end, it’s a guaranteed short sale, or they can simply do a deed in lieu of foreclosure. So, the reason they’re more expensive specifically comes down to the upfront mortgage insurance premium. That is 2% of the appraised value up to $1,209,750 this year that goes directly to FHA and to their mutual mortgage insurance fund, which is running in excess of $45 million.

It’s just like paying into a homeowner’s insurance policy, it’s just like paying into an auto policy, it’s just like paying into a long-term parent care policy. Everybody pays into it since this is not a taxpayer funded or poverty program, everybody pays into it.

And then if there’s a claim and someone’s upside down at the end defaults on the loan, FHA will then dip into the MMI fund to make the investor whole and make sure that there’s no personal liability to the children.

You mentioned the origination fee. The origination fee is anywhere from $2,000 to $6,000. That goes to the mortgage company that has originated the loan for compensation for services rendered, that origination fee can be negotiated between the homeowner and the lender. And then you just have your traditional closing costs, which consist of your processing, underwriting, title fees and appraisal fees.

Bruce Hosler (17:41):

And everybody thinks they’re different, but I tell them, look, if you have a regular forward mortgage, you have closing costs, you have annual insurance premiums you have to make, you have interest in servicing fees — those are all very similar between a reverse mortgage and a regular forward-looking mortgage.

And the homeowner’s insurance and property taxes, you have those, sometimes they’re paid through the mortgage, sometimes they’re not in an equity, in an escrow account. One of the things I run into is if one of the children lived close by or perhaps there’s a child living with mom and dad, and they’re going to live in the house after you die, that may not be a house that we want to have a reverse mortgage on.

Rob Kanyur (18:22):

Correct.

Bruce Hosler (18:23):

That’s not necessarily a fit. The other one I run into is kind of like me, if you have a really low interest rate, which Rob, thank you for that, you refinanced me-

Rob Kanyur (18:33):

You’re welcome.

Bruce Hosler (18:33):

In the middle of COVID, I signed it through a car door window-

Rob Kanyur (18:36):

Yeah, you did.

Bruce Hosler (18:38):

And I think I have 2.38%. I’m old enough now, I finally got old enough I could do a reverse mortgage, but I’ve elected not to do it because I’m looking at the money and I’m like, look, that 2.38%, I can take that money and I’m working it much better as an investment advisor, I’m going to keep that mortgage.

But the time may come in the future where I’m like, you know what, I don’t want that house payment anymore, I’m going to retire. When that time comes in the future, that may be the time. So, there’s a timing element on this for people too, maybe right now is not the moment but later on. So, I just want to put that out there that not everyone is a fit, and there’s always a moment for everyone but these are very powerful tools.

Rob, I love our conversation today, thank you so much for being here. Jon, I don’t know, do you have any other final closing thoughts or comments?

Jon Gay (19:27):

This has been really eye-opening for me because as we referenced in our first part of this two-part series, there’s a lot of bad information and a lot of negative stereotypes about reverse mortgages. So, this has been a really interesting conversation for me, and my folks are in their 70s, so I’ve been sort of taking mental notes of what’s been going on here.

Rob, if our listeners want to reach out to you, how do they best find you?

Rob Kanyur (19:47):

My phone number is 602-REVERSE. So, (602)-361-1587 or email robk@home.com. Our website is www.reverserob.com.

Jon Gay (20:04):

I love the branding there.

Rob Kanyur (20:04):

Thank you.

Jon Gay (20:05):

Bruce, if somebody wants to reach out to you at Hosler Wealth Management, how do they reach you and your team?

Bruce Hosler (20:08):

Hey, they can reach us on the website, hoslerwm.com. There’s a little window on the top right, you can click to set an appointment or reach out to us, or if you want to call one of the offices; in Prescott, (928)-778-7666; in Scottsdale, (480)-994-7342.

Jon Gay (20:28):

Excellent. Thank you for both parts of this conversation, Rob. If you have not, go back and listen to the first episode here and we’ll talk to you both soon.

[Music Playing]

Rob Kanyur (20:34):

Thanks Jon. Thanks Bruce, appreciate you.

[00:20:37] Disclosure: 

Investment advisory services are offered through Mutual Advisors, LLC DBA Hosler Wealth Management, a SEC registered investment adviser. Securities are offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Advisors, LLC and Mutual Securities, Inc. (collectively “Mutual Group”) are affiliated companies. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties,  2) promoting marketing or recommending to another party any transaction or matter addressed herein, and 3) Tax preparation and accounting services are offered independently through Hosler Wealth Management Tax Services. Any tax advice provided by tax professionals under Hosler Wealth Management Tax Services is separate and unrelated to any advisory or security services offered through Mutual Group. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Mutual Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Accordingly, Hosler Wealth Management does not warranty, guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.