Reverse Mortgages for Cash Flow & Suitability of Private Mortgages

Neil: "Hey everyone, welcome back to Getting Your Sh*t Together, where we tackle all things mortgages, finance, and everything else that keeps you up at night! I'm Neil, and as always, I'm joined by my co-host Jerome."

Jerome: "Hey, everyone. Today, we’re diving into a topic that’s near and dear to our senior listeners—or should I say, our ‘seasoned homeowners’? It’s called a reverse mortgage. And no, it’s not some kind of time-travel device that takes you back to your youth, although I’m sure many would love that option."

Neil: "Yeah, I’m sure. But hey, a reverse mortgage can still be a powerful tool if used right. Think of it as a way to make your house pay you for a change. So today, we’ll break down the pros, the cons, and everything in between. And don’t worry—we’ll make it as painless as possible."

[Segment 1: Understanding Reverse Mortgages]

Neil: "Alright, let’s start with the basics. A reverse mortgage is essentially a loan secured by your home. But unlike your regular mortgage where you pay the bank every month, with a reverse mortgage, the bank pays you—until you sell, move out, or kick the bucket. It’s like Monopoly money, but this time it’s real!"

Jerome: "Exactly. It’s specifically designed for homeowners aged 55 and older who have significant equity in their homes. So, if you’re sitting on a house worth half a million and still eating canned beans for dinner because your retirement savings have gone poof, this might be worth looking into."

Neil: "Oh, and no monthly payments. You heard that right—zero payments. It's like a unicorn in the world of loans. But remember, just because you’re not making payments doesn’t mean the interest fairy isn’t adding to your tab."

[Segment 2: Why Consider a Reverse Mortgage?]

Jerome: "So, why would anyone go for this? Simple—cash flow. If you’re tired of stretching your pension like it’s a piece of gum, a reverse mortgage can be a way to access the equity in your home in various forms: lump sums, monthly payments, or even a line of credit."

Neil: "Yup. It’s basically your house’s way of saying, ‘Hey, you’ve been paying the bills for decades, now let me return the favor.’ You can use the money to supplement your retirement income, pay off debts, fund home renovations, or even give your grandkids that down payment they’ve been hinting at during every family dinner."

Jerome: "And if you’re feeling adventurous, you could even fund that dream vacation. After all, why not sip margaritas on a beach while your house takes care of the bills?"

[Segment 3: The Fine Print (A.K.A. The Cons)]

Neil: "But hold on a second, because there’s always a catch, right? Let’s talk about the not-so-glamorous side of reverse mortgages. First off—interest. Just because you’re not paying it doesn’t mean it’s not adding up. It’s like that treadmill you bought with good intentions but never use—it’s sitting there, accumulating dust and guilt."

Jerome: "And don’t forget the fees! There are upfront fees for legal advice, appraisals, and closing costs that reduce the amount you actually get, by a little bit. So, before you start planning your dream yacht purchase, remember: the bank will take its slice of the pie."

Neil: "And if you’re thinking about leaving your house as an inheritance, a reverse mortgage might complicate things. The loan gets repaid when you sell or pass away, which could mean your heirs end up selling the house to settle the debt. So, if you were hoping to leave a golden nest egg, you might just be handing them a golden bill."

Neil:

Hello, and welcome back to another episode of "Getting Your Sh*t Together." I’m Neil Joseph, here with my co-host, Jerome Christensen. Today, we’re diving into a topic that can be a lifesaver for some but might seem intimidating to others – Private Mortgages.

Jerome:

That's right, Neil. Private mortgages aren't the first option most people think about when it comes to borrowing, but there are situations where they can be exactly what a borrower needs. We’ll break down why someone might consider a private mortgage, what to watch out for, and when it can be a smart, short-term solution.

Neil:

We’re not here to sell you on private mortgages but to help you understand when they make sense. And, just a heads-up, we’ll be talking about real numbers and actual experiences, including a recent file Jerome worked on that needed a quick close. So, let’s get started.

[Segment 1: Introduction to Private Mortgages]

Neil:

So, Jerome, let’s start with the basics. What exactly is a private mortgage, and why would someone even consider it?

Jerome:

A private mortgage is a loan funded by a private lender rather than a traditional bank or financial institution. These are usually short-term loans, often ranging from 6 months to a few years, with interest rates that can be between 7% and 12%, depending on the file and the documentation provided.

Neil:

That’s quite a bit higher than what most people are used to seeing with conventional mortgage rates. What’s the reason for that?

Jerome:

Good question, Neil. The higher rates reflect the additional risk the private lender is taking on. Unlike traditional lenders, private lenders are more flexible with their criteria – they don’t just look at income and credit scores. If you have a unique financial situation or need to close quickly on a property, a private lender can be a viable option.

[Segment 2: When to Use a Private Mortgage]

Neil:

Let’s get into some scenarios where a private mortgage might be the right choice. Jerome, you’ve recently had a case that was pretty time-sensitive, didn’t you?

Jerome:

Yes, exactly. It was a new build, and the borrower had to close within 10 business days. The traditional lenders we approached couldn’t complete the process within that time frame. So, we turned to a private lender who could move quickly. The private mortgage came in at an interest rate of 11.49% for a 6-month term, with a 1.5% lender fee and a 1.5% broker fee, plus the legal costs.

Neil:

So, the borrower ended up paying quite a bit more than they would have with a conventional lender. But it sounds like there were no other options if they wanted to close on time.

Jerome:

That's right. The borrower was at risk of being sued and losing the property if they didn’t close. In this case, the higher costs were worth it to avoid legal trouble and secure the home.

[Segment 3: The Costs Involved]

Neil:

Let's talk more about the costs associated with private mortgages. You mentioned the higher interest rate, Jerome, but what other fees should borrowers be aware of?

Jerome:

In addition to the interest rate, you’ll typically see lender fees and broker fees, which can range from 1% to 3% of the loan amount. Then there are legal fees because you’ll still need a lawyer to finalize the mortgage. In some cases, you might also face appraisal fees or other administrative costs.

Neil:

It sounds like the costs can really add up. That’s why you need to think about the long-term impact, right?

Jerome:

Absolutely. Private mortgages are not meant to be a long-term solution. They’re for specific situations where you need short-term access to funds. That’s why having an “exit strategy” is essential.

[Segment 4: The Importance of an Exit Strategy]

Neil:

Jerome, when you say “exit strategy,” what exactly does that mean for a borrower?

Jerome:

An exit strategy is the plan you have for paying off the private mortgage and transitioning to a more conventional form of financing. This could mean refinancing with a traditional lender once your situation has improved or even selling the property if that makes more sense financially.

Neil:

So, a borrower should never just take out a private mortgage without knowing how they’ll get out of it?

Jerome:

Exactly. You need to be realistic about how long you’ll need the funds and make sure you have a concrete plan to repay or refinance. Most private lenders will require you to outline your exit strategy before approving the loan.

[Segment 5: The Benefits Beyond the Costs]

Neil:

We've focused a lot on the higher costs, but what about the benefits of private mortgages? What makes them worth considering?

Jerome:

One major benefit is speed. Private lenders can often approve and fund a mortgage much faster than traditional lenders. This can make all the difference in a competitive market or if you need to close quickly, like in the case I mentioned earlier.

Neil:

And sometimes, the peace of mind that comes with knowing the deal will go through is worth the extra cost, right?

Jerome:

Definitely. Easing anxiety or avoiding legal trouble by securing the funds when you need them is a big deal. But again, it’s not something you should use as a go-to option; it’s a tool for specific situations.

[Segment 6: Case Study – A Real-World Example]

Neil:

Jerome, let’s go back to that case you handled recently. Can you walk us through it in a bit more detail?

Jerome:

Sure. So, the borrower was purchasing a new build – he signed the agreement in 2022 and sent in the request to his own bank for financing. Unfortunately, his bank was unable to complete the request, but didn’t tell him until about 2 weeks before the closing date. We submitted the file to traditional lenders, but with the tight timeline, it just wasn’t going to happen. The private lender we engaged was able to approve the loan at 11.49% interest, with a 1.5% lender fee for a 6-month term. Including legal fees, the borrower was looking at a significant upfront cost, but it allowed them to close on time and avoid any legal ramifications.

Neil:

And what was the exit strategy?

Jerome:

The plan was to refinance with a traditional lender within the 6-month term. The borrower’s situation was expected to improve, allowing them to qualify for better rates with a conventional lender.

[Segment 7: How to Decide if a Private Mortgage is Right for You]

Neil:

So, Jerome, what advice would you give someone who’s considering a private mortgage? How do they know if it’s the right move?

Jerome:

First, consider whether your need is truly short-term and urgent. If so, a private mortgage could be a solution. Next, evaluate whether you have a realistic exit strategy – refinancing, selling, or another plan to repay the loan. Finally, make sure you understand the costs involved and how they could impact your financial situation.

Neil:

So, it’s about weighing the pros and cons and making sure the benefits outweigh the risks.

Jerome:

Exactly. And don’t be afraid to seek professional advice. A mortgage broker can help you navigate the options and ensure that a private mortgage is used effectively as a short-term tool rather than a long-term burden.

[Conclusion: Key Takeaways]

Neil:

To wrap up, private mortgages can be a useful short-term solution in specific situations, especially when traditional financing isn’t an option. But they come with higher costs and risks that need to be carefully managed.

Jerome:

If you’re considering a private mortgage, make sure you have a clear exit strategy and understand all the associated costs. It’s not something to be used lightly, but with the right approach, it can solve a pressing problem.

Neil:

Thanks for tuning in to “Getting Your Sh*t Together.” If you have any questions or want to learn more about private mortgages, reach out to us. And don’t forget to subscribe for more episodes on navigating the world of mortgages.

Jerome:

Catch you next time. Stay informed, stay prepared, and as always, keep getting your sh*t together!