By Duane Duggan and Clare O’Callahan
On the RE/MAX of Boulder (ROB) Radio program host Duane Duggan speaks with Bob Groening, Senior Reverse Mortgage Educator at Goldwater Bank, to discuss reverse mortgages and what you need to know about them.
As defined by the Federal Trade Commission, a reverse mortgage enables you to “convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills…you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home.” According to the Consumer Financial Protection Bureau, in order to qualify for a reverse mortgage: (1) You must be as least 62 years old, (2) Your home must be your primary residence, and (3) You must have paid off some (or all) of your traditional mortgage. Reverse mortgage is based on 60% of a home’s appraised value up to $625,500 as well as the owner’s age and current interest rates. From the algorithm, the principle limit, or the total loan amount, is calculated.
Reverse mortgages used to carry a bad name, but according to Bob Groening of Goldwater Bank, those connotations are changing. He often uses the acronym HECM—standing for Home Equity Conversion Mortgage—to explain a reverse mortgage as allowing homeowners to access the equity in their home as liquid funds.
Formally looked at as a last resort option for low income households, Groening says reverse mortgage has become “a financial planning tool for all ranges of income,” especially now as the more people are living into their nineties. Because they are non-recourse loans, a borrower or heir will not end up owing more than the collateral is worth.
Since March of last year, reverse mortgage loan regulations been revised to prevent previous issues with loan recipients spending the entire sum before paying taxes and insurance, and have also added a new provision for non-borrowing spouses. The revisions provide two alternatives for mortgage insurance (MI) which allow loan recipients to access up to 60% of the total loan amount during the first year and pay .5% of the appraised value. However, if more than 60% of the total loan amount is needed due to mandatory obligations, it can be distributed at an upfront mortgage insurance rate of 2.5%.
Groening notes that on April 27th a financial assessment will be required for anyone considering a reverse mortgage. As part of the financial assessment, the following mandates will be applied: (1) The borrower(s) must demonstrate both the capacity and willingness to pay taxes and homeowners insurance, (2) They must have sufficient residual income for a partial or full Life Expectancy Set Aside (LESA), and particularly, (3) In Colorado a borrower and his/her spouse would need a residual income of $998 to have no required LESA.
Deciding on a reverse mortgage is a complex decision. In fact before a borrower can close on one, it is required that the borrower take a class to learn all of the advantages and disadvantages of a reverse mortgage. In addition, tax and financial planning advice should be considered before making the ultimate decision.
 Federal Trade Commission Consumer Information: http://www.consumer.ftc.gov/articles/0192-reverse-mortgages
 Consumer Federal Protection Bureau: http://www.consumerfinance.gov/askcfpb/224/what-is-a-reverse-mortgage.html