I was planning to name this article “Ground Hog Day”, but figured I could kill two birds with one title and imply the other 😉 But, the point of that title is correct. Each day you waken to the same alarm clock, and the same routine for an eternity without any explanation or reason. On payday, you receive the same relative sum of income, and pay the same relative bills, and one of those bills is your mortgage.

You tear the stub off the statement, and the breakdown catches your eye…You know- that “break down” of your payment. The who-gets-what part…and you notice that approximately 25% of your payment will actually reduce the principal sum of your debt; the rest goes into the Lender’s profit/pocket.

But wait! You might get to deduct that 75% part, and redeem some value for the cost of funds! Right? Well…from a cost/benefit analysis, Mortgage interest deductions cost a dollar, and return 20-35% of those dollars in your refund/offset. (I wouldn’t brag about that as an investment).

I will now introduce you to the main title “ESCAPING NEVERLAND”. First, let’s diagram (if only in your mind’s eye) but certainly feel free to grab a pen and paper) “Neverland” is the “kingdom of futility” one goes through with the current (Working-era mortgage debt program). One realizes they will NEVER escape the payment landscape of “Neverland”…

Draw a rectangle on its right side. Place your pen tip at the bottom-left (about 20% of the way up that vertical line)and run a straight line to the top right corner. The lower area is principal pay-down; the upper is interest pay-down.

See the problem? Notice how “top-heavy” the mortgage expense is? It is typically around 22 YEARS (out of 30) before the mortgage interest and principal are at parity (50/50). Again, the only “benefit”? Is being able to deduct and offset the expense of that interest by approximately 20-25% (subject to new tax rules from 2018) So, “spend a dollar, and get $.25 cents back”? Not a good benefit. I could also make a strong argument regarding the reduction of taxable income and how that may ultimately impact your future social security benefits in retirement, but let’s save that for another day.

Here’s another point-(Societally), we look at mortgage debt as one dimension. You start using mortgages to acquire property in your 20’s-30’s and pay off the final balances (ideally) in your 50’s early 60’s (just in time for retirement). The supporting notion to this scheme is the reason you pay off your home is so you’ll have a payment free retirement and be able to transfer the real estate to your Heirs. This was more validly supported when America had more Farming operations and larger parcels that were actually worth being inherited. Our Present “postage stamp” lots with our shrubbery and bluegrass means it may be nice to look at it, but isn’t very valuable beyond the market price. In over 65% of the times? Heirs will liquidate the home and are willing to take a blood bath doing it. Private sales (realtors) are often 60-70% of market; auctions are even worse. The reason is that in virtually all cases, the Heirs cannot afford to continue making mortgage payments and need to sell the home as quickly as possible. The legal fees, late fees, interest charges, etc that are assessed against a home in estate foreclosure will quickly eat up any remaining equity. Often, there’s nothing left to inherit if they drag their feet waiting on a “fair-minded” buyer. Compare this to the new model of mortgage debt. As contrasted by “Working years mortgage debt” (WYMD), we now have “Retirement years mortgage debt” (RYMD).

WYMD “IS” “Neverland” (as in, “This is never gonna end” land. Groundhog Day.

RYMD is an achievement. It is a “reward for 40+ YEARS of good behaviors”. It applies to only those who are over 62, and have at least 50/50 debt to value on their property. The will allow RYMD the opportunity to step in and change the dynamics of retirement and of debt during retirement.

“What “dynamics” are you referring to, Dan?!?”

DYNAMIC 1- Paying mortgage interest in the old “WYMD” mortgage model is unavoidable, and deprives the Borrower of substantial wealth. After age 62, this is avoidable, and should be avoided at all costs.

Let’s refer back to the rectangle. notice how every payment for the first 22 years is substantially more interest than principal? In the first 5 years, Interest comprises over 75% of each payment. That is to say, a mortgage (P&I) payment of $2,400/month is literally $1,900+ of useless and costly interest. At a 4% 30 yr fixed rate $400,000.00 loan? The cost of interest is approximately $370,000.00 on top of the $400,000. The reason you got the mortgage was because you didn’t have cash to buy the place but, you did have TIME, and, “CASH FLOW”. Essentially, the ratio of interest and principal has been considered “the price of doing business”. Even now, new mortgage constructs are being developed and marketed that have significantly reduce interest costs and greatly improved Homeowner equity and availability to it.

DYNAMIC 2-“Mortgage Interest” represents the sum of equity and savings that could have been saved had the mortgage interest been “manageable”. After 62, it IS “manageable.

Assuming a $2,400.00/ month P & I mortgage payment (for 30 years), has a ratio of $400.00/mo (“P”) and $2,000/month (“I”), converting to RYMD at 62 means saving $2,400.00/month. That’s $30,000/yr in PRINCIPAL. The Borrower is improving the equity ability by a factor of SIX. If you chose to invest this money in a wool SOCK in your dresser drawer, you would create more equity in the first year than after 6 years in a conventional WYMD. So, then let’s apply the concept as an investment-earning a rate equal to the RYMD program, you create an arbitrage of simple vs. compound interest. While the load debt is higher and interest would accrue in a larger number, it’s also true the interest need not be paid. RYMD is a “Non-Recourse” option. So, any level of acceptable investment risk becomes a superior way of accumulating new wealth while in early retirement (critical to future retirement needs, bad outcomes, shortages, etc.). The point is the Borrower was “on board” for 30 years of mortgage payments during retirement. If the sum at conservative rates exceeds the debt in 18 years, has the Borrower lost? No. The Borrower has a huge sum, and can afford to exercise several options at their discretion.

-Liquidate the account, and pay off the RYMD. Doing so would trigger a 1098 from the Lender that could have significant impact on income or capital gains taxes due from that liquidation.
-Borrower may do nothing, and (if an annuity or Life insurance is used), estate protections for the Heirs and liquidity with a “stepped-up basis in value” allows them to use the proceeds to liquidate the RYMD and (most likely) have substantial monies left over. This is especially valuable to the Heirs as Life Insurance is improbable.
-Borrower may liquidate and pay down (not pay OFF) the RYMD. This will substantially reduce the mortgage debt, trigger a 1098, and here’s the wonderful part-EVERY DOLLAR PAID is immediately re-available in the line of credit automatically. This HELOC is Federally Insured, and cannot be suspended, reduced, or cancelled and is further guaranteed to continue adding new equity for the remaining time there is equity available in the HELOC for the rest of the life of the Borrower(s), up to 150 years from the DOB of the youngest Borrower.
-Borrowers may convert some, most, or all of the HELOC line into HECM “TENURE” payments guaranteed for the remaining time of occupancy in the home. This is a superior option as payments received are tax free, non-recourse, and cease if both parties no longer occupy the home (e.g. long term nursing home care). ***This will stop the cash flow instead of continuing to feed Medicaid Spend Down requirements, and ultimately preserve the home equity for future distributions to Heirs.
-Borrower may annuitize some, most, or all of the account on either life of the Borrower or use an equal age annuity to provide life long income guarantees. In other circumstances, the Borrowers may use the Reverse HECM HELOC (Not the fixed rate) and cash out of existing assets that are subject to the Medicaid Spend Down and make a single sum payment to reduce (not “pay off”) the debt to $1,000.00, and qualify faster for benefits, then after the recovery or passing of the ill Spouse, funds may be repatriated back into the investments for the benefit of the surviving Spouse, or both.

DYNAMIC 3- “The WCMD is partially responsible for the lac of savings Retiree’s endure today. Coupled with onerous income taxes on multiple levels, there simply isn’t enough income possible to build the sums needed to assure retirement success. The FHA HECM HELOC RYMD is the solution that makes it possible for a couple considering retirement planning to re-purpose the mortgage payment and make the very best use of the remaining funds from occupational income. In fact, in cases when only a third or quarter of the money needed can be saved? Executing the RYMD makes it plausible to save substantially MORE money and accelerate possible choices and outcomes, or, reduce the exposure to market risks involved with tighter budget streams in accumulating additional funds. Inevitably, the circumstance of a Client needing to save an additional 30% of their income to make a retirement plan feasable is going to mean working later into retirement to maximize Social Security benefits.

Now, let’s look at another perspective of this- Some Jumbo HECM reverse mortgages may allow borrowers to refinance current debt at age 60. In the scenario we’ve been using, that’s an additional accumulation of $60,000 in 2 years. Additional years of payments may be adjusted downward due to the Borrower’s ability to restructure cash flow and improve savings. This method may involve either fixed or HELOC Jumbo programs (but) my professional advice is for the Jumbo HECM HELOC (if there’s one available in your State). Currently, “Finance America Reverse, Inc” has the only Jumbo HECM HELOC on the national market spectrum. Jumbo HECM’s do not have the protections or the expenses of a FHA program due to the lac of FHA insurance (MIP). In spite of that fact, these programs are marketed as “Home Safe” HECM Reverse mortgages, and it is not an accident. They are STILL safer for the Borrower and family than conventional mortgage debts, and the Jumbo debts tend to cover a significantly larger refinance, and (consequentially) the release of a much larger mortgage payment that may be repurposed for savings. Jumbo’s have done evrything they can to creatively mirror the benefits of a FHA program but with out the MIP premiums. In my opinion, they do a darned good job of protecting the Retiree’s, Survivors, and the Family.

The RYMD is the solution to this quandary.

 

 

-For Financial Planners and Retiree’s living in Hawaii Kai, Kaneohe, Waikiki, Ewa Beach, Honolulu, Wapahu, Pearl City, Kailua, Mililani, Manoa, Hilo, Kapole’i, Waikoloa Village, Kailua-Kona, Kamuela, Honoka’a, Mountain View