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 owning more than the collateral is worth.
Reverse mortgage is based on 60% of a home’s appraised value up to $625,500 as well as the owner’s age—reverse mortgage applicants must be 62 or older—and current interest rates. From the algorithm, the principle limit, or the total loan amount, is calculated.
“One of the biggest misconceptions that exist about a reverse mortgage,” Groening says, “is that the bank takes ownership of the property.” Groening dismisses this myth, stating that ownership is retained in a reverse mortgage just as it is in a more traditional forward mortgage.
To prevent previous issues with loan recipients spending the entire sum before paying taxes and insurance and therefore being forced into a foreclosure, reverse mortgage loan regulations were revised last October. Currently, loan recipients can access up to 60% of the total loan amount during the first year any pay just .5% in upfront mortgage insurance. If an amount greater than 60% of the total loan amount is needed, it can be distributed in the first year at an upfront mortgage insurance rate of 2.5% .
Groening notes that loan applicants must keep in mind miscellaneous fees such as closing costs and appraisals still apply to reverse mortgages as they would a forward mortgage. In addition, though interest is deferred until the owner leaves the home, the homeowner is still required to pay taxes and insurance.
For the full interview with Bob Groening, listen to RE/MAX of Boulder Radio.