by DUANE DUGGAN Realtor and Author RE/MAX of Boulder

Colorado is one of the fastest aging states in the country and Boulder County is also rapidly aging. Reverse mortgages are becoming more popular as baby boomers retire and want to maintain their standard of living. The reverse mortgage is a financial tool, which has helped many over 62 years old. In my previous article, I introduced how to qualify for a reverse mortgage. In this article, I will discuss in more detail the benefits and disadvantages of a reverse mortgage.

Ideas for using a reverse mortgage

  • It can provide income when you are down to your home equity as your last source of retirement income.
  • You can refinance a standard mortgage to eliminate monthly payments. (You are still required to pay property taxes, insurance, and maintain the home.)
  • It can serve as standby portfolio protection. You can use the Reverse Line of Credit to enhance your cash flow in economic downtimes.
  • You can use the funds to purchase or maintain a long-term care policy.
  • It can act as a potential hedge against future declines in home equity because of guaranteed increasing credit lines. (Applies to unused funds)
  • It can provide income while a retirement portfolio continues to grow.
  • It can supplement income from an underperforming retirement portfolio.
  • I can be used to supplement income while waiting longer to receive Social Security Benefits.
  • It can be used to purchase a downsized retirement home and have no payments. The proceeds of the reverse mortgage can be distributed in lump sum, equal monthly payments, or as a line of credit with a variable interest rate.
  • Proceeds from a lump sum disbursement (secured by the personal residence) can be used to purchase an investment property. If a qualifying homeowner chooses, the homeowner can use a reverse mortgage to buy a duplex, triplex, or a 4 unit. The homeowner needs to live in one of the units as their personal residence, then they can rent out the units they don’t live in for income.
  • You can use reverse mortgage proceeds to buy a second home.
  • It could replace the need for a cash reserve bucket.
  • You can use it as a gift to your family. You can help a family in need or simply leave a larger legacy for your own family. You could possibly fund college or a home for the next generation.
  • You can gift it to a nonprofit.

Benefits of a reverse mortgage

  • Loan proceeds are not considered income and are not taxable. A reverse mortgage could allow a senior to stay in their home by enabling the senior to receive monthly income rather than make payments.
  • The payments made to the senior are not taxable.
  • If there is an existing loan, it can be paid off from the initial proceeds of the reverse mortgage.
  • The formula for the reverse mortgage prevents the mortgage from exceeding the value   of the home.  When the senior dies, the estate inherits the home and any equity after the reverse mortgage is paid off.
  • There are no restrictions as to what the proceeds of the reverse mortgage can be used for.
  • A reverse mortgage is a non-recourse loan.

Disadvantages of a reverse mortgage

  • The costs of getting a reverse mortgage are usually higher than a normal mortgage.  There is a requirement for mortgage insurance, which adds to the upfront costs.
  • Government assistance programs, such as Medicaid or Supplemental Security Income, might be affected if too much is withdrawn in one month. The local administrator for these programs should be contacted for individual details.
  • Reverse mortgages are complex, and the senior should get tax and legal advice if the details are not fully understood.  It is a good idea to use a loan officer who is local and specializes in reverse mortgages.
  • The reverse mortgage is a negative amortizing loan, which means the balance increases over time if you do not make monthly payments.

Jumbo reverse mortgages

The Reverse Mortgage product described above is an FHA program. The loan limit is determined by FHA.  As of April 2022, the FHA maximum claim amount is $970,800. In high- value market areas, such as in Boulder County, a Jumbo Reverse Mortgage product can open up many more opportunities. The structure of the loan is similar to the FHA program. To those that qualify, Jumbo Reverse Mortgages are available up to $4,000,000.

You can contact a mortgage lender specializing in reverse mortgages to see if it works for you. The rules and interest rates change over time and those specializing in reverse mortgages know all the details.

For more information on a variety of senior living topics, consider attending the Aging at Altitude Expo this Sat., April 23, from 9 a.m. to 2 p.m. at the Boulder JCC, 6007 Oreg Ave. in Boulder (corner of Arapahoe and Cherryvale). At this event, there will be a panel discussion about reverse mortgages.

Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail [email protected], call 303.441.5611 or visit boulderco.com.