Legal Forms of Homeownership in Colorado
In section 2.1 of the Colorado Contract to Buy & Sell Real Estate the buyer must decide how they want to take title, or ownership, of the property they are purchasing. The options included on the contract are Joint Tenants, Tenants in Common, and Other. As your Colorado real estate agent, it is my job to help you understand these terms, so you, as the buyer can make the decision that is best for you. If you are unsure as to which type of homeownership is best for you, I would advise that you discuss it with your tax advisor or attorney. With that being said, let’s get into learning about the most common ways you can hold title in Colorado. Severalty – A single individual holds title in severalty. Joint Tenancy – Joint Tenancy is a type of concurrent, or co-ownership, between two individuals or entities in which they each have equal interest in the property. This means both owners equally share in the benefits of owning the property and both are equally responsible for any financial obligations on the property. As a result, joint owners may not sell their interest in the property without consent from the other owner. Joint Tenancy also creates what is known as right of survivorship. This means that when one owner dies, their interest in the property is automatically transferred directly to the surviving owner. Pros – Even with no will or beneficiaries named, the property transfers directly to the other owner without having to go through probate or the court system. Cons – Divorce or marital issues can complicate a Joint Tenancy since both owners must agree. Also, joint tenancy gives all ownership to the other owner upon death, which does not allow for the deceased to pass their interest in the property to their heirs. Tenancy in Common – Tenancy in Common is also a type of concurrent, or co-ownership. However, with Tenancy in Common, each owner can have a different share of ownership interest, rather than an equal share as in a Joint Tenancy arrangement. And, each owner is allowed to independently sell or borrow against their portion of ownership. They can also decide what will happen with their share upon their death, meaning they can pass it along to an heir of their choosing. Pros – The number of owners can change and owners can have different degrees of ownership. Cons – There’s no right of survivorship, all owners are equally liable for debts and taxes, and a single owner can force the sale of the property. It’s important to understand that in Colorado the default co-ownership type is Tenancy in Common. If you decide to take ownership as Joint tenants, you will want to make sure it is stated on the deed. Usually the phrasing is something like “not as tenants in common but as joint tenants.” Ideally, this is something your real estate agent should be checking for you, but unfortunately not all do. You will receive a copy of your deed during the closing, so that is the best time to check for the proper wording. Colorado Springs Real Estate Professionals – TEAL Pro Team backed by EXIT Realty Mountain View Natalie Olmsted and Jennifer Mencl are motivated REALTORS® specializing with Future First Time Home Buyers and Last Time Home Sellers located in the following areas; Colorado Springs, Pueblo, Monument, Peyton, Fountain, and surrounding areas. Natalie and her team strive to provide you the very best service to make your real estate experience stress free. Call Natalie Olmsted at 719.287.8067.
Today's Reverse Mortgage
A reverse mortgage is a unique loan which allows homeowners to convert part of the equity in their home into cash payments. They are only available to those who are 62 and older and own their home outright, or have at least 50% equity in their home. In this particular loan scenario, the lender will use various factors to determine the initial principal loan limit. Typically, the older you are, the more the property is worth, and the lower the interest rate, the higher the principal loan limit. Once this amount is established, the homeowner can then choose to receive payments as a lump sum, fixed monthly payment, or line of credit from the lender. With each payment, interest and fees are rolled into the loan balance. Over time, the balance of the loan is actually increasing and equity is decreasing. The loan balance and interest on a reverse mortgage becomes due and payable when one of four events occur. If the homeowner sells the house. If the house is no longer the homeowner’s primary residence, meaning if they vacate the property for more than 12 consecutive months due to mental or physical illness, pass away, or move out. If the homeowner fails to pay homeowners insurance, property taxes, or if they let the property deteriorate beyond what is considered normal wear and tear, the lender might require the homeowner to repay the loan in full. Reverse mortgages can be a good option for some seniors whose net worth is mostly tied up in their home, and need cash to pay for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income. However, there are disadvantages to them as well, including consequences for spouses and heirs. So, it’s important to understand how reverse mortgages work and what they mean for you and your family before deciding to get one. Types of Reverse Mortgages 1. Single Purpose Reverse Mortgages • Least expensive option • Provided by state & local governments and some non-profits • Received funds can only be used for certain purchases, such as home repairs/improvements or property taxes, but the specific use is dictated by the lender.2. Proprietary Reverse Mortgages • Private loans backed by private companies • Can typically receive a larger loan advance, especially with a higher valued home • Be careful - they can attract unscrupulous professionals who use reverse mortgages as an opportunity to scam unsuspecting seniors out of their property’s equity.3. Home Equity Conversion Mortgages (HECMs) • Most common reverse mortgage type and likely the one you’ll get • Federally insured & backed by the US Department of Housing & Urban Development (HUD) • Received funds can be used for any purpose • Can be more expensive than other loan options • Borrower can choose how they receive their funds 1. Lump sum 2. Fixed monthly payments 3. A line of credit 4. Combination of regular payments and line of creditSince HECMs are the most popular reverse mortgage type, that is what I will be focusing on for the remainder of the outline. HECM Eligibility Requirements Borrower Requirements:1. All borrowers must be 62 or older (including any co-owners listed on the home’s title)2. Own the property outright or have at least 50% equity • Typically, if the borrower doesn’t own their house outright, they will need to use some of the funds received from the reverse mortgage to pay off their existing mortgage.3. Occupy the property as your principal residence • Cannot vacate, leave, or move out of the property for more than 12 consecutive months4. Cannot be delinquent on any federal debt5. Must be able to continue to make payments for property charges such as: • Property Taxes • Home Insurance • HOA Fees6. Participate in a consumer information session given by a HUD-approved HECM Counselor to go over the following: • Eligibility requirements • Financial implications • Alternatives to obtaining a HECM • Provisions of the mortgage becoming due and payable • Repaying the loan • How a HECM could affect Medicaid & Supplemental Social Security Income (SSI) • Cost for counseling is around $125 & it’s a 90 minute session Property Requirements:1. Single family home or 2-4 unit home with one unit occupied by the borrower2. HUD-approved condominium project3. Individual Condominium Units that meet FHA Single Unit Approved Requirements4. Manufactured home that meets FHA requirements (built after June 1976)5. The above eligible property types must meet all FHA property standards & flood requirements Financial Requirements With a HECM, there is generally no specific income or credit score requirement. However, lenders will conduct a financial assessment to assess the following: • Income, assets, monthly living expenses, and credit history • Timely payment of real estate taxes, hazard & flood insurance premiumsThey’re evaluating your willingness and ability to meet your obligations and the mortgage requirements. Based on the results, the lender could require funds to be set aside from the loan proceeds to pay things like property taxes, homeowner’s insurance, and flood insurance (if applicable). Requirements for How Much You Can Borrow The amount of money you can get from a reverse mortgage depends upon a number of factors, such as: • Your Age • The Current Interest Rate • The lesser of the appraised value of your home or the FHA lending limit (which varies by county)Homeowners are likely to receive a higher principal limit the older they are, the more the property is worth and the lower the interest rate. Despite the reverse mortgage concept in practice, qualified homeowners are not likely to be able to borrow the entire value of their home even if the mortgage is paid off. Part of the home equity must be used to pay the loan’s expenses, including mortgage premiums and interest. How Can I Receive Payments from a Reverse Mortgage? Payment options are tied to the interest rate option so:1. Fixed Interest Rate: • Payment is received in a single lump sum only2. An Adjustable Interest Rate: • Term Option - fixed monthly cash advances for a specific time. • Tenure Option – fixed monthly cash advances for as long as your live in your home • Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted • A combination of monthly payments and a line of creditReverse mortgage proceeds are not taxable. The IRS considers the money to be a loan advance, rather than income to the homeowner. HECM Costs The closing costs for a reverse mortgage aren’t cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you don’t have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.1. Mortgage Insurance Premiums – Federally backed reverse mortgages have a 2% upfront mortgage insurance premium and annual premiums of 0.5%.2. Third Party Charges – These fees include appraisals, home inspection, credit checks, title search and title insurance, closing costs, and recording fees3. Origination Fee – Typically range from 1% to 2% of the loan amount and is capped at $6,000.4. Servicing Fee - Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. • Fixed rate - Cannot exceed $30 • Adjustable rate – Cannot exceed $355. Interest • Fixed Rate – Can start under 3.5%, but you can only receive one lump sum payment with this option • Adjustable Rate – Interest rate varies based on the London Interbank Offered Rate (LIBOR), with a margin added for the lender.This bears repeating: shop around and compare the costs of the loans available to you. While the mortgage insurance premium is usually the same from lender to lender, most loan costs – including origination fees, interest rates, closing costs, and servicing fees – vary among lenders. When Does the Loan get Paid Back? You do not have to repay a reverse mortgage until:1. You sell the home • Can use the proceeds of the home sell to pay off the reverse mortgage2. The home is no longer the homeowner’s primary residence. The home is no longer considered the primary if it has been vacated for more than 12 consecutive months. This could include: • Moving out (voluntarily or involuntarily) to a healthcare facility such as a hospital, rehabilitation center, assisted living facility or nursing home • Passing Away - Your heirs will be responsible for paying off the mortgage with other funds from your estate, their own funds, or proceeds from the sale of the home.3. The homeowner fails to pay homeowners insurance or property taxes • In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses.4. The homeowner lets the property deteriorate beyond what is considered normal wear and tear Pros of Reverse Mortgage 1. Can provide much-needed cash for seniors whose net worth is mostly tied up in the value of their home, which can be used: • To pay for out-of-pocket healthcare expenses • For supplementing retirement income • To cover the cost of needed home repairs2. Allows the homeowner to keep title of the home and to continue to live in it3. All loan costs can be rolled into the balance of the loan4. Doesn’t require the homeowner to make loan payments to the lender as long as you live in the home5. Interest rates are competitive with other types of mortgages Cons of Reverse Mortgage 1. You’re spending a significant amount of the equity you’ve accumulated on interest & loan fees2. You could potentially outlive the mortgage proceeds3. Reverse mortgages become complicated if there is a spouse involved. Do your research to determine whether the spouse will be able to stay in the home, or if they will lose the home due to a forced sale to pay off the loan.4. Your heirs may or may not be able to inherit your home. In order to keep the home, they will have to pay either the full loan balance or 95% of the appraised value - whichever is less. If they lack these funds, they will likely have to sell the home.5. Be aware of reverse mortgage scams Links for additional information US Department of Housing & Urban Development (HUD)Consumer Financial Protection BureauFederal Trade Commission Consumer Information
The Importance of an Estate Plan
To understand estate planning you have to understand what an estate is. Your estate is simply the collection of everything you own, or your assets. Your house (or any property for that matter), bank accounts, stocks & securities, life insurance policies, retirement accounts, cars, art, jewelry, furniture, clothes, heirlooms, etc. are all potential assets in your estate. And while you are alive and sound, it’s easy enough to understand that you are capable of administering the affairs your own estate. But what happens if you become incapacitated or die? Who’s in control of you and your estate then? Without an estate plan, shockingly the answer is the state of Colorado. In the event that you become mentally or physically incapacitated, the court will decide how your assets are used for your care. They will appoint a conservator – of their choice, not yours – to manage your assets on your behalf. And when you die, any assets held in your name (and without a beneficiary designation) will be distributed by the court through a probate proceeding. In this case, the court will appoint a personal representative – again, of their choice, not yours – to distribute your assets. And here’s the really bad news… Those assets will be distributed, not according to your wishes and desires, but according to the state of Colorado’s intestacy law! However, having an estate plan can change all of that. In the event that you become incapacitated, you can appoint medical and financial powers of attorney – of your choosing – to carry out affairs on your behalf. You can appoint guardians - of your choosing - to care for minors and/or pets. And in some cases, when you die, your estate can avoid probate altogether. With that being said, it’s important to understand an estate plan is an entire collection of legal documents and not just a will. Having a will does help. But it won’t bypass probate, it won’t apply everything you own, and it doesn’t apply when you are in a state of incapacity. When it comes to estate planning, having a comprehensive plan in place is the only guaranteed way to ensure your wishes and desires will be carried out. And, everyone and every situation is unique. What you own, how you own it, your family dynamics, and your ultimate goals are all important factors in creating a plan that is right for you and your family. If you are interested in learning more about estate planning and want to learn it from an attorney, consider joining us on January 23 at the East Library for a free seminar. Click here for more information and to register.
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