When consulting in Colorado Springs, I often receive similar questions from those approaching retirement. They wonder whether it would be better to sell their current home and move to a smaller place, or if there is a way to keep their home while utilizing their equity. Comparing these two options makes it easier to understand why reverse mortgages are considered a viable choice.

A reverse mortgage is a product that allows homeowners aged 62 and older to borrow against the equity of their home. Unlike a traditional mortgage, where payments are made monthly, borrowers receive funds from the lender in a lump sum, monthly payments, or a line of credit. The loan principal and interest are repaid when the home is sold, the owner passes away, or the home is no longer used as the primary residence. Among these, the HECM (Home Equity Conversion Mortgage), which is insured by the Federal Housing Administration (FHA), is the most common type and the only reverse mortgage backed by the U.S. federal government.

It's also important to consider the withdrawal methods. If a large sum is needed at once, a lump sum can be chosen; if a steady cash flow is required monthly, monthly payments can be selected; or if funds are needed only occasionally, a line of credit can be utilized. However, regardless of the method chosen, interest will continue to accrue on the loan balance. Additionally, eligibility requirements must be met. Borrowers must be at least 62 years old, the home must be their primary residence, and if there is an existing mortgage balance, it must be at a level that can be paid off with the reverse mortgage funds. A financial assessment to determine the ability to continue paying property taxes and insurance is also required.

The median home price in Colorado Springs is approximately $499,900 as of 2026 (Zillow). The methods of securing profits through downsizing and converting part of the home equity into cash flow each have their pros and cons. Downsizing involves the burden of moving and settling in, but it allows for full cash conversion of assets, while a reverse mortgage enables homeowners to maintain their familiar neighborhood and home while generating funds for living or medical expenses.

However, it should be noted that a reverse mortgage is not a product that provides free cash. Initial costs, such as origination fees, mortgage insurance premiums (initially around 2% and an annual rate of 0.5%), and closing costs, tend to be higher than those of traditional mortgages. Additionally, the loan balance increases as interest accrues monthly, which means that over time, the homeowner's equity decreases, potentially reducing the inheritance left for children or heirs.

If the terminology is unfamiliar, think of it this way: property taxes and homeowners insurance premiums are obligations that the owner must continue to pay even after receiving a reverse mortgage. The effective property tax rate in El Paso County, where Colorado Springs is located, is relatively low at around 0.37 to 0.4% compared to the national average (Ownwell), but the obligation to pay does not disappear. It is crucial to understand that failing to manage these costs could lead to default and the risk of losing the home. The population aged 65 and older in Colorado is about 13.8% of the total (Colorado Health Institute), and it is expected that households facing these concerns will continue to grow.

During the HECM application process, HUD-approved counseling agencies assess the applicant's financial status and provide specific guidance on loan limits, interest rates, and future costs. This counseling is not a mere formality; it serves as a safeguard to ensure that applicants have sufficient information to make informed decisions. If considering downsizing, it is helpful to compare local market prices and property tax burdens within Colorado Springs, as well as school assignments and living infrastructure.

The non-recourse structure means that if the home value falls below the loan balance, heirs are not required to pay the excess amount thanks to FHA insurance, which is considered an advantage. However, this product requires mandatory counseling from a HUD-approved counselor before applying, and there are actual scams targeting the elderly related to reverse mortgages, so caution is advised. Whether downsizing or opting for a reverse mortgage is the right choice varies by household, so it is recommended to make a decision after thorough consultation and discussion with family. This article does not constitute investment or legal advice, and it is advisable to consult with a professional before entering into any contracts.