How Reverse Mortgages Work with Scott Smith

george grombacher 0:02
went for this George G. And the time is right welcome today’s guest strong, powerful Scott Smith. Scott, are you ready to do this?

Scott Smith 0:08
I am. Thanks so much for having me on.

george grombacher 0:10
excited to have you on let’s go. Scott is 21 year old 21 year, maybe you’re 21 years old to Scott, you are a 21 year mortgage professional with Barrett financial. They are a wholesale lender, he’s recognized as a top 1% mortgage professional in the United States. He’s focused on integrating your mortgage with your overall financial plan to maximize cash flow, liquidity, and strategies to build your net worth. Scott, I’m excited to have you on tell us about your personal life more about your work and why you do what you do.

Scott Smith 0:43
All right, fantastic. So I’ve lived in Arizona for 25 years, married, we live out in Mesa got beautiful mountain views from the house. And it’s me, my wife and the dog in the house. I like that I’m close to the river, I like to get out and do some paddleboarding. Got a golf course in my backyard, which I don’t play on very often. But it’s fun to watch others. And I’m very passionate about helping people figure out how to use a mortgage as a tool, as opposed to just looking at it as a debt. Like people don’t understand that. We can integrate it into an overall financial plan to help them build net worth, reduce our taxes, increase our cash flow. And it takes a lot of education. But I love talking to people about that stuff, which makes me a mortgage nerd. I know.

george grombacher 1:27
Yeah, you’re huge mortgage nerd. So you’re obviously over the age of 21, just to close the loop on that one. So reverse mortgages. Tell me a little bit about that.

Scott Smith 1:37
You know, I really I started started about 10 years ago, and I got deep into a four and a half years ago. And most homeowners are unaware of how to monetize their home equity. And there’s a ton of home equity out there. And it’s not unusual that advisors are also unaware of some of the lesser known benefits of a reverse mortgage. And like they may be aware of the big picture. And then it exists, but they really need somebody to unlock the details on how to use the loan as a tool. And you know, home equity is fantastic to have. It’s a big part of America’s net worth their overall finances. But it’s it’s not working for you as an asset, right. It’s trapped, and it’s underperforming. So the reverse mortgage is a tool that unlocks the equity, and allows people to have enough assets to last their own lifetime by creating an extra bucket of money. Most importantly, it gives them absolute peace of mind that they own their house outright. And they can stay until they’re age 150 as dictated by the mortgage. No.

george grombacher 2:42
All right. And is there one reverse mortgage? Are there different kinds?

Scott Smith 2:46
I’m glad you said that. So I thought today We primarily focus on the one that’s backed by the federal government. It’s backed by FHA, which is the Federal Housing Authority overseen by HUD, Housing and Urban Development, it’s the most common, it’s over 95% of the reverse mortgages that are done. And there are proprietary loans, which we use more for jumbo loans or specialty cases. But primarily, it’s the heckum. We call it Home Equity Conversion Mortgage agcm. That’s the safest most conservative, backed by the federal government.

george grombacher 3:19
Okay, safest, most conservative backed by federal government. All right. And how do I qualify for that? Is there a kind of person that shouldn’t be thinking about this? I guess that’s kind of a difficult question to ask.

Scott Smith 3:33
Sure, the starting point is you got to be a homeowner, right? Gotta be over 62 years old. And it’s for primary residences, we don’t do it for vacation homes or investment properties. And we’re looking based on current interest rates, we need about 60% equity, to be able to get help somebody get into a reverse mortgage, and that 60% equity could be to refinance their existing home and get rid of the payment. Or it could be to buy a new home with a 60% down payment, be able to either case be able to stay with no principal and interest paid or for the life of the loan. And so yeah, those are the primary qualifications. Credit Score is not a big deal. And incomes not as big a deal as most we need enough income leftover that they can afford their bills and a couple 100 bucks left a month, six trips, specifically in the Southwest US.

george grombacher 4:25
Okay, fair enough. So when you’re talking to people about reverse mortgages, if it’s professional advisors or consumers, what you get objections, you get misconceptions, we

Scott Smith 4:39
do and we got a ton of that and I want to unpack those. But before we do, let’s just talk about what’s involved in a reverse mortgage real quick. And now let’s get to some misconceptions. So it allows you to stay without a monthly payment. We discussed that briefly and I should say principal and interest payment, because you still have to pay tax insurance and HOA Joe Just as if you own the house outright, right. And one of the lesser known benefits is if you have enough equity and we’re doing a refinance, we can create a line of credit. And the line of credit is guaranteed as long as you’re in the home, it doesn’t defer interest if you’re not using it. Because it’s worth noting a trusted reverse mortgage, when you don’t make a payment. It defers interest through regular mortgage, it’s got to be paid off when you sell the house, right. And the goal is that you’re going to sell it, pay off the loan, keep the equity, okay? But it does have the line of credit feature. And if you don’t use it, it grows guaranteed at whatever interest rate, the line is at or whatever the mortgage is at. So let’s say a 7%. Mortgage today, if you’ve got $100,000 line of credit, after one year, it’ll be worth $107,000. After three years, it’ll be worth $121,000. And in 10 years, it would have doubled, it’d be worth 200,000. So you’ve got the fact that you get rid of your principal and interest payment, you may be able to access a line of credit. And then some people use it to actually take monthly income every month, and that income is guaranteed for life. But it’s not taxed. Because it’s not actually income. It feels like income, but you’re just releasing your home equity. Okay. So I think you asked about the misconceptions, and I took it a different direction, right?

george grombacher 6:18
I don’t know. Yep. Lay it on me.

Scott Smith 6:20
So let me ask you like, why would somebody be afraid of this? Like, what do you hear George, when people talk about this,

george grombacher 6:25
I am always reticent about excessive and exorbitant fees, and and people not understanding what they’re getting themselves into?

Scott Smith 6:33
Absolutely. So I hear that a lot. There’s significant fees, people don’t understand that. One of the biggest things I hear is that people are afraid of losing their house or that, you know, when they pass that they might, you know, their kids have to take care of it right. And none of those things are accurate. So let’s unpack a couple of things. So as far as people knowing what they’re getting into, before you can even start the loan, you have to do independent counseling with 100 counts 4550 megaphone session, they’re going to make sure you know, the fees, the cost, the fact that it is a mortgage, that has to be repaid at some point. And then to have like a third party independent source, who can kind of walk you through the whole thing, right. And as far as the fees, they are higher than a traditional mortgage. And we can talk about that quickly. But with that said, normally, when you sign up for a mortgage, you sign up for 30 years of payments three decades. So when we talk about fees, and what it costs to get into a loan, you know, when we think about a traditional mortgage that we’re all used to you sign up to make payments for three decades. And if your principal payment is, for example, only $1,000 month, talking about spending $360,000. That’s pretty exorbitant, right? Maybe to buy on the low end like a $200,000 house, you’d spend that much with a reverse mortgage, it does have higher closing costs than a traditional loan. But you have complete freedom from payments, and you have total peace of mind and security that you can stay on the home forever. So you have to ask yourself, what’s that worth. And when I started looking at this long, 10 years ago, I worked for what we consider a retail lender, and I thought they were too expensive. So when I switched to the wholesale lending side where we can shop for the lowest rates and the lowest cost, and we can strip out a lot of the margin or profit. That’s when it really got intriguing to me, because we can lower those fees dramatically. So that’s a big deal. And one of the things people worry about is is there a bit of a death consequence, like if I died is my my family have to pay it off, or what happens when I die? And like I said before, but like anything you pay off that you sell the house, get the proceeds pay off the mortgage, you keep the equity, if there’s no equity, it’s a non recourse loan, which means that neither you nor your family has to ever repay more than the house is worth. So it’s actually really safe. It’s been changed up over time. And the client always owns the house. They never go on title. That’s a big misconception. So there’s a lot to like about and the loan was put in place by the government to protect people in secure home ownership and make sure their life’s work. They can enjoy it in retirement.

george grombacher 9:24
So got it. Nice. I appreciate that. And it’s till age 150. Yes, that’s a number that they’re just like, You know what, let’s be conservative. There will be folks that are going to live to 150. We better set it up that

Scott Smith 9:38
it’s actually written into the mortgage. Note that you can use it up till 158 150 As long as you occupy the house, you only for more than 12 months and you pay tax insurance and HOA just like if you own it for cash. And it’s interesting. Nobody’s used it that long, obviously right? But there may be people on the earth right now. They’re gonna live to be age 120 or 130. Some of the things they’re doing on life expectancy are pretty amazing right now,

george grombacher 10:06
for sure. All right. If you don’t mind, I would like to potentially go through some round numbers just to go through a scenario. Let’s say that, that my mom has a home. And as probably a lot of folks who are listening, they have aging parents who are maybe retired or they’re going into retirement. And wouldn’t it be nice if we didn’t have a mortgage going into retirement? Get a reverse mortgage, because my mom has within the parameters that we talked about, she has 60% equity in this home, takes out a line of credit. And let’s just say that the house for easy math is worth $100,000, she gets $20,000 line of credit, okay, draws the $20,000 out in the first year, that 20,000, it’s going to be growing at 7% rate of return. And if she lives, you could stop me at any point. If she lives, let’s say she’s 70 years old, she lives for 30 years dies at age 100. The house is now worth 500,000. But that 20,000 grew to $600,000.

Scott Smith 11:08
Absolutely. So one of the things that is key to help me understand this as understanding the rule of 72, right, you know that you take any interest rate, you divided into 72. That’s how long it takes for something to double. So in your example, if she had a $20,000 line of credit at closing, and she didn’t use it, if it grew by 7% per year, you divided into 72, that line of credit is going to double in 10 years. And so starts at 20 grand, 10 years, and it’s worth 40 grand 20 years out, it’s worth I got lost in the 80 Grand, thank you very much. And it’ll just keep growing. And the beautiful part is you don’t defer interest on that. Okay, that’s available for you for renovations and the house down the road or aging in place. Or if you need medical care, you need to bring in somebody to help you with day to day. So yeah, that’s a really great tool.

george grombacher 12:04
If she did take the money out and used it, yeah. And then at the end of of her life at age 100, that she now her debt is $600,000. And the value of the house is 500,000. And she passes away. And now I am the owner of the home, I can either write the bank could check for 600 grand, or I can give them the house.

Scott Smith 12:29
Yeah, correct. So you actually you wouldn’t come to the bank a check for 600,000. So if you choose, you can just sell it give the proceeds to the lender. And it’s painful. One of the features that people rarely take advantage of on the loan is, let’s say it’s your childhood home, it’s a beautiful house, you’d love to have it as a second home or or your own home, you can actually buy it for 95% of the appraised value. So in this example, she owes 600, it’s worth 500, you can actually buy it for 95% of that $500,000, which I want to say is like $475,000. So although we don’t expect it to happen, it’s not set up that way, that’s a home run for your mom, because she got to use $100,000 More than January pay got to live in the house the whole time. Nice. And let me lay her onto that George, because they’re settled right now to have 60% equity, when rates are lower, it’s more like 50% equity. But if houses just appreciate at 4% per year, which is right around the national average for housing appreciation, the growth in the value of the house is gonna far outpace the growth in the loan. Because when you’re not making a payment, you’re deferring interest, your balance goes up slowly. But the value of the house and just 4% growth will go up much faster than the deferral of the loan, because they want you to be able to have equity. And in the perfect scenario, you’re gonna buy the house, or refinance into the reverse, you’re going to use it for decades. And when you’re done, you or your family is going to sell it, and there’ll be hundreds of 1000s and equity left.

george grombacher 14:03
Got it? Thank you. All right. So what are some of the strategies for as we are putting together a finance somebody’s financial plan? How, how can this fit in?

Scott Smith 14:13
So there’s so many ways and people don’t think about it, right? So in the financial planning business, one of the key lessons I was taught was having different buckets of money, right, so you’ve got your IRA, or you’ve got your pension, which is not happening very often anymore, right? You’ve got tax preferred, or you’ve gotten non tax preferred. The home equity is one more bucket of money that we can put into play using the reverse mortgage. So maybe if there’s enough equity, we could establish a line of credit to be able to allow someone to delay taking Social Security, right, because as you know, there’s a big increase in Social Security payout, if you delay from age 62 to age 67 or later, right. You know, maybe you’ve got somebody who’s aged 62 Who makes really good money, but he’s Under saved or she’s under saved for retirement, and she’s trying to figure out, hey, do I get this mortgage paid down to get closer to paying it off? Or do I start putting away money for retirement? Well, what if you do both? What if you get the reverse mortgage in place, and instead of paying the money to the lender, where it’s not liquid, it’s not going, you can go ahead and take those mortgage funds that you were paying, once you have the reverse mortgage, you don’t have to pay him, you can start putting it in for your investment for your retirement. And that might allow somebody to catch up quickly on savings. Okay, and then the line of credit can be used a lot of different ways. One of the biggest concerns when you go into retirement is what if you need to withdraw from your portfolio, and we’re having a terrible market the markets down 20 30%, it’s not a good time to sell your assets, right. So you could use your line of credit. So you could draw from the line of credit when the markets down in the hopes that your portfolio would recover? Before while you still had some line of credit available. And that would do a lot for your portfolio’s longevity. So there’s different strategies that we can use to try to use home equity to make sure that you’ve got enough money to last your whole life. And so one of the things that I think is underlooked is a mortgage is typically somebody’s biggest payment. So let’s keep it simple. Let’s just say they’ve got $1,000 month principal and interest payment. Okay, so if you get rid of that payment, that’s $12,000, a year that somebody saves, right? So $120,000 in 10 years and savings $240,000 in 20 years, well, that money can really add a lot of value to someone’s life, right, like being able to take away their biggest expense is a gift, like it changes people’s lives, it really does. And, you know, sometimes we do these loans for people that really need them. A lot of times we do it for clients that have pretty significant net worth, but they feel like there’s a higher use for these funds. So it’s really powerful when you start looking at all the different ways that you can do it. And if you eliminate somebody from spending $240,000 on a mortgage and 20 years, you can imagine what that does to portfolio return, right? So it’s pretty powerful. Yeah,

george grombacher 17:19
I love it. It gives you so much more flexibility potentially. So let’s just talk about somebody who is who is financially really well off, and they don’t need the money, but likes to be smart likes to find the highest and best use of their money. So they go through the process, and they open up a HECM agcm product that we’ve been talking about here. And there are closing costs and expenses and stuff like that, if they’re not drawing on their line of credit, the line of credit is, is is growing, but are are they incurring any costs or are additional debt?

Scott Smith 18:00
No, the cost is to get the mortgage set up, and they are part of the loan. So we want to make sure we disclose it all and they know what there is, but there’s not a cost to have the line of credit in place. So as you can imagine, it’s a fantastic financial planning tool. And the line of credit can never be froze. You know, when we were in the great financial reset of 2008. When housing prices plunged, a lot of people had a home equity line of credits for the reason you’re mentioning just to have a bucket of money they could access and a lot of those got frozen and shut down. And this line of credit can never be frozen. It can never be shut down. And in fact, it’s guaranteed to grow at whatever interest rate the loans out. And and I’d love to tell you a story about somebody who’s financially savvy. Do you mind if I share? Yeah. So I had a client who had retired he was age 63. His wife was 62. He had sold products to financial planners his whole life. So he’s very financially savvy. His wife was a judge and a partner in a law practice. And they retired with a house that was worth about 2.9, in a high end part of town here called Paradise Valley is worth 2.9 million, they owned it outright. They had a portfolio of about $4 million, and they wanted to buy a second home. But they didn’t really want to liquidate their portfolio. They didn’t want to cut a check for a million dollars and they didn’t want a mortgage. And they both have pretty good life expectancy and good health and their family. So they started looking at some options. Somebody recommended that they talked to me. And we had some conversation about how this might look. We did a lot of education, a lot of unpacking it. And when it was all done, we did a cash out refinance on their house, got them back, just a hair under a million dollars. And then they bought a second house vacation house in a lake community up in Idaho. And now they’re enjoying two houses without a mortgage payment. They’re getting appreciation on two houses, and they’ve held their portfolio in place for their retirement while they’re still young and able to enjoy time with the family and the grandkids at the house. US. So there are a lot of ways that you can use this for people that are well off and well heeled for retirement.

george grombacher 20:06
That’s one of those win wins, you hear about. Yeah.

Scott Smith 20:10
And one of my missions is to get this message not only out to homeowners, but to advisors, because I think a lot of advisors are aware that it’s out there, and they might think my clients don’t need this, or my clients are well off. But you know, from the adviser side, this is a tool that your clients can use to keep more assets under management, to give them peace of mind that they’re going to have enough assets to be able to get through their life comfortably. And, you know, sometimes, you know, maybe it’s just for a loved one in your life who is under saved. And, you know, one of the things I love is going back and talking to people like a year later, and the things they say are just they’re amazing. Like, you know, I’ve had people say to me, like, hey, how does it feel to not have to make a payment after decades making a payment? And then like, it’s, it’s crazy. It’s weird. I’m like, Why? Why is it weird, he’s like, because I know the house is mine forever. It’s just weird to not have to cut a check. And I talked to a wonderful lady who is very, very good at budgeting, she had to be good at budgeting. Because it was just her she didn’t have much income, fixed income. And once you’ve been in for about six months, I just called to say hi, and check in and ask her how it felt. And she said, Scott, I can’t tell you how great it is to be able to go to sleep and know that I don’t have to worry that I have enough money to get through the month. Every month, I used to worry about that I used to have to budget and I couldn’t do anything. I’ve had other people tell me, I haven’t been on a vacation in eight years. And that was to go to a funeral. So it really changes people’s lives. And it gives them a lot of mental peace to know that they can stay forever, that they don’t have to worry as much about money. And we’ve just got to find people that need to get this message. And advisors need to put it in their wheelhouse to think about, Hey, maybe I need to talk to my client about what is their home equity look like? What are their plans? Are there some other options? And that’s kind of my message.

george grombacher 22:04
I love it. I think it’s a great one. Scott, thank you so much for coming on. Where can people learn more about you? How can they engage if you are a client interested in learning more about this or if you’re a professional advisor?

Scott Smith 22:16
So it’s real straightforward. Just give me a call, I’d love to talk to you. It’s my phone number is 602-373-5202. Again, that’s 602-373-5202. Or of course you can email me it’s like my name is Scott Smith, except it’s s Smith, at Barrett financial.com. So SS myth, have ba RR e TT financial.com. And this is an education process and whether we’re talking about a homeowner, or an advisor, it’s a process right and we have to unpack it and I’m here to go on that journey with people and help them figure out what their options are.

george grombacher 22:53
Excellent. Well, if you enjoyed as much as I did show Scott your appreciation and share today’s show with a friend who also appreciates good ideas. Give Scott a call 602-373-5202 or shoot him an email s Smith at Barrett. It’s two R’s two T’s financial.com Thanks again, Scott.

Scott Smith 23:13
Hey, before we wrap it up, I want to tell you, I really appreciate your work. I encourage everybody to check it out. Pick them episodes they like and leave a review because it’s amazing and we need to get the word out. So thank you.

george grombacher 23:25
Thank you. Okay, and until next time, remember, do your part by doing your best

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