Reverse mortgages, explained

A reverse mortgage lets a homeowner 62 or older borrow against the home's value without monthly mortgage payments. Interest and fees are added to the balance each month, so the balance grows and the equity shrinks over time.

The loan is repaid when the last borrower sells, moves out for good or dies; usually the home is sold to repay it. Living somewhere else for most of the year counts as moving out, and so does more than 12 straight months in a health care facility when no other borrower lives in the home. An eligible non-borrowing spouse may be able to stay in the home after the borrower dies or moves into care, if HUD's conditions are met.

Most reverse mortgages that refinance a home you own can be cancelled without penalty within three business days after closing. That right does not apply to a HECM used to buy a home.

HECMs are insured by FHA and are non-recourse: neither the borrower nor the heirs owe more than the home is worth. When the home is sold to repay the loan, the sale follows the servicer's rules on price and timing, and FHA's insurance covers a shortfall. Heirs who want to keep the home can repay the lesser of the loan balance or 95% of the home's appraised value, within the servicer's deadlines.

The home stays yours. Falling behind on taxes or insurance, or moving out, can make the loan come due. Before approval, the lender looks at whether you can keep paying those costs and may set money aside for them.

FHA's mortgage insurance on a HECM is 2% of the maximum claim amount at closing (the lowest of the appraised value, the price when you buy, and the $1,249,125 limit) and 0.5% a year of the balance. Origination fees and the usual closing costs apply too, and most of it can be paid from the loan. Because the costs come out of your equity, a reverse mortgage usually costs more than a regular mortgage or a HELOC.

How much you can borrow depends on the age of the youngest borrower or eligible non-borrowing spouse, the interest rate, and the home's value up to $1,249,125. Any existing mortgage and the loan's costs come out first. A fixed-rate HECM pays one lump sum at closing; an adjustable-rate HECM can pay a line of credit, monthly payments, or a combination.

Owners 62 and older can buy a home they will live in with a HECM for Purchase: a down payment from savings or a home they sold, with the reverse mortgage covering the rest. It is common when downsizing or moving closer to family.

A reverse mortgage can make sense when you plan to stay in the home for many years, want to end a monthly mortgage payment or add income, and are comfortable leaving less equity to heirs.

It fits less well when you may move in a few years (the upfront costs weigh more), when a spouse under 62 would be left out, or when another option covers the need for less.

Rules protect an eligible non-borrowing spouse from having to leave the home when the borrower dies, but only if conditions are met and named at closing. This is one of the first things counseling covers.

Colorado exempts 50% of the first $200,000 of a home's actual value for owners who are 65 or older on January 1 and have owned and lived in the home for at least 10 straight years; the state pays the exempted tax. Apply with your county assessor by July 15 for the next year's tax bill. Qualifying disabled veterans and some surviving spouses have their own exemption; the assessor has the full rules.

Colorado's Property Tax Deferral Program lets owners 65 and older defer property taxes as a simple-interest loan from the state, a lien repaid when the home is sold or the owner no longer lives there. Mortgages and liens can total no more than 75% of the home's value, and no reverse mortgage can be on the home. Apply through your county treasurer between January 1 and April 1.