Reverse Mortgages in Colorado: A Prime Spot for Retirement

Colorado seniors have an average personal income of $50,000. While the state has one of the highest senior household incomes in the country, many seniors still depend on Social Security for at least 50% of their annual income. 

In that case, a reverse mortgage in Colorado may seem like the best course of action. Currently, the state has one of the highest usage of reverse mortgages. They’re easy to qualify for, non-taxable, and non-payable until a maturity event. 

Here’s everything you should know before you borrow one for your new home.

What is a Reverse Mortgage?

A reverse mortgage is a specific loan type for senior investors. It allows elderly homeowners to acquire funding in a non-traditional way. 

If they have enough home equity, they can acquire a reverse mortgage loan, which is typically funded as a line of credit, monthly payment, or lump sum. The unique factor of this mortgage loan is that you don’t have to pay it back during your lifetime. 

Reverse mortgage loans become due and payable once the borrower passes away, moves out permanently, or sells the home they were funding. They only have to pay back the home’s resale value, even if it’s less than the original loan amount. 

The borrower is not responsible for paying the difference since these mortgages are insured.

Types of Reverse Mortgages

There are two types of reverse mortgages: HECMs and proprietary reverse mortgages.

1. Proprietary Reverse Mortgages: Seniors can borrow up to $4 million in home equity with proprietary reverse mortgages. However, this generous loan limit comes at a cost – proprietary reverse loans are highly susceptible to scams. All loan proceeds are disbursed tax-free.
2. Home Equity Conversion Mortgages (HECMs): HECMs are a lot easier to get approved for. They’re also sometimes referred to as FHA reverse mortgages since the lenders need to be approved by the FHA. The national HECM lending limit was increased to $625,500 by the American Recovery and Reinvestment Act in 2009.

How Reverse Mortgages Work in Colorado

Reverse mortgages don’t require homeowners to make payments to the lender. Instead, it’s the other way around – hence the name. 

The borrower can also choose how they’ll receive the funds. They also don’t need to pay more interest than the original owed amount or any upfront since the loan balance collects it. The best part is that you’ll also keep the home's title.

Of course, loans always come with a catch. Your debt will increase, and your home equity will drop over the reverse mortgage term. Your home will also be the collateral for this loan. 

If you move permanently or pass away, the house will be sold to pay off the loan. If the resale value exceeds the owed amount, the rest will go to you or your estate. 

The IRS states that reverse mortgages are not taxable. According to Title 11, Article 38 of the Colorado Revised Statutes, a reverse mortgage in Colorado must meet certain criteria:

• Secondary homes, investment properties, and vacation homes do not qualify.
• Reverse mortgage borrowers can pay back the loan at any time without penalty.
• Payments will not be decreased due to changes in the interest rate. 
• If the lender fails to fulfill the loan advances as stipulated, they may lose the privilege to accrue interest and be liable for any resulting civil damages.

Pros and Cons of Reverse Mortgages

Pros

• Financial Security: Only 59% of Colorado seniors have dedicated retirement savings. Reverse mortgages can be a beneficial choice for retirees with limited cash savings and investments. This type of loan will allow them to turn their illiquid assets into additional income as long as their properties have enough wealth.

• Flexibility: You can receive the funds as a lump sum, a line of credit, or even monthly payments.

• Non-Recourse Loan: According to the IRS, proceeds from a reverse mortgage are considered non-resource debt. That means borrowers or their heirs will never owe more than the home's value when it's sold to repay the loan.

Cons

• Costs and Fees: Variable interest reverse mortgages are tied to benchmark indexes like the Constant Maturity Treasury (CMT). In such cases, the lender often adds a 1%-3% margin to the base rate. So, if your index rate is 2.5%, you can expect an interest rate of 3.5–5.5%.

• Impact on Inheritance: Since a reverse mortgage taps into your home equity, the money your heirs inherit will likely be reduced. The loan balance, including interest and fees, will be deducted from the home's sale proceeds.

• Risk of Foreclosure: The borrower doesn’t need to start paying off the loan until a maturity event. However, they still need to meet certain maintenance requirements the lender sets. If they fail to do so, the lender has the right to foreclose.

Specific Considerations for Colorado Residents

1. State Regulations

Reverse mortgages in Colorado are non-recourse loans. That means borrowers or their heirs will never owe more than the home's value when it's sold to repay the loan.

Borrowers also have the right to withdraw their loan application at any stage. They even get a 3-business day grace period after signing the closing documents. Most importantly, borrowers can pay back the loan at any time without penalty.

2. Housing Market Trends

Housing market trends in Colorado have an impact on the reverse mortgage rates. 

For instance, in Denver, homes typically sell for around 1% below the listing price at an average sales price of $617K. That means reverse mortgage borrowers in Denver can potentially get more equity from their homes compared to areas with lower home prices.

3. Local Resources

Reverse mortgage counseling is mandatory before applying for a reverse mortgage. Luckily, the counseling session typically takes 1–1.5 hours. Plus, there are currently 11 HUD-approved reverse mortgage counselors located throughout Colorado. 

Reverse Mortgage Scams and How to Avoid Them

Unfortunately, scammers target seniors who are considering reverse mortgages to exploit their financial vulnerability. In fact, AARP estimates that $28 billion a year has been stolen from senior victims of financial exploitation. Here are some common ones to watch out for.

• Foreclosure Rescue Scam: These scams prey on seniors already facing foreclosure, promising a solution through a reverse mortgage. The truth is, that a reverse mortgage only adds another layer of debt. The homeowner is still left responsible for property taxes, insurance, and maintenance. 
• Equity Theft Scam: This scam involves dishonest appraisers, lenders, and even attorneys. They work together to inflate the value of the senior's home, allowing them to access more equity through the reverse mortgage. The scammer pockets a major portion of this inflated value, leaving the homeowner with less financial security.
• High-Pressure Sales Tactics: Pushy lenders create a sense of urgency or dangle unrealistic benefits to senior homeowners, forcing them to make an uninformed decision.

How to Avoid Reverse Mortgage Scams

The first step is to know the warning signs of a scam. For instance, reputable lenders won't bombard you with unsolicited calls or mailers. Be wary of anyone pressuring you into a quick decision, especially if you haven't initiated contact.

Keep in mind that no one can predict the future housing market. A lender promising your home value will only go up is likely trying to mislead you. Lastly, while educational seminars can be helpful, some are just a ploy to get your contact information and push a reverse mortgage product. 

The question is, how do you avoid such scams when seeking a reverse mortgage?

• First and foremost, talk to trusted advisors. Involve your adult children, a financial advisor, or an attorney specializing in elder law. Their objective perspective will help you figure out whether you’re dealing with a scam.
• The US Department of Housing and Urban Development (HUD) requires counseling from a government-approved agency before you finalize a reverse mortgage. This session teaches you all you need to know about the process, risks, and alternatives.
• Check the lender's credentials with the Federal Trade Commission (FTC) and your state attorney general's office. Make sure they are licensed and have a clean record.

How to Decide if a Reverse Mortgage is Right for You

Here’s how to decide whether a reverse mortgage is the right path for you:

Personal Financial Assessment

• Assess your equity. Reverse mortgages are only available if you have enough equity in your home – around 50% or more. 
• Consider your current and future retirement income streams. Will a reverse mortgage supplement your income or become your primary source?
• Be realistic about your current and projected living expenses. Can a reverse mortgage comfortably cover your needs over the long term?
• Reverse mortgages are designed for those who plan to age in place. Are you committed to staying in your home for the foreseeable future?

Consider Alternative Options

Explore other financial options that might suit your needs:

• Home Equity Loan (HEL): A traditional HEL offers a lump sum with a fixed interest rate and repayment term. This is a better pick if you need a certain amount of money upfront.
• HELOC (Home Equity Line of Credit): Much like a credit card, a HELOC provides access to a revolving line of credit secured by your home equity. You only pay interest on the amount you use.
• Downsizing: Selling your current property and buying a smaller, more affordable one can free up cash and lower your living expenses.

Conclusion

Reverse mortgages are a flexible option for seniors, but they can also be susceptible to scams. Don’t go at it alone – hire a financial advisor to guide you through the mortgage approval process. Contact us today at Equity Access Group.