Not only has the reverse-mortgage industry left its infancy stage and started racing towards adolescence, but its next growth step apparently will be coming sooner than expected.
While reverse mortgages for second homes have been available through a handful of small regional banks, they will soon be offered by at least two national lenders. Bank of America, which recently announced an agreement to acquire the reverse-mortgage business of Seattle Mortgage Co., is expected to roll out the second-home wrinkle as soon the purchase is completed next month. BNY Mortgage, which last week introduced the industry’s first jumbo fixed-rate product, also will allow reverse mortgages on second homes under certain guidelines.
“The demographics of our seniors and the upcoming boomer group indicate there are multiple tentacles of financial planning tools that could be used in the long run,” said John Nixon, executive vice president and COO of Reverse Mortgage of America, a division of Seattle Mortgage Co. who will be moving over to BofA. “One of those tools would be helping people with significant equity in the second home to help tap that equity to make their lives more comfortable.”
Historically, reserve mortgages have been made to homeowners age 62 or older and exclusively on a primary residence. Rapidly appreciating and long-held second homes have become surprisingly valuable, providing another possibility for older homeowners to draw funds to supplement their income for monthly expenses, health care, family reunions and investments. There are no restrictions on how reverse-mortgage funds are used.
Sarah Hulbert, executive director for BNY Mortgage’s western regional center, said the New York-based lender would allow its new Prime Advantage fixed-rate jumbo reverse mortgage on a second home, provided the owner did not already have a Prime Advantage loan on the primary residence.
Reverse-mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home.
Fixed-rate mortgages had been absent from the reverse-mortgage scene for more than decade until earlier this year. In the past, lenders relied primarily on adjustable-rate mortgages insured by the U.S. Department of Housing and Urban Development. These mortgages, known as Home Equity Conversion Mortgages (HECMs), account for nearly 85 percent of the reverse market. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private “jumbo” reverse plans also have been available.
A reverse mortgage on a second home could be an appealing alternative for an individual or couple wanting to keep a family vacation home a few more years. Often, the parents would like to leave a cabin or getaway to their children yet need the equity from the cabin for their retirement years.
With a reverse mortgage, the parents could receive a needed monthly draw, lump-sum payment or helpful line of credit. When the parents die or transfer title to their children later in their lives, the kids could sell the property and pay off the reverse mortgage with the proceeds or refinance the property and continue the second-home use. When a child reaches the age of 62, the child would become eligible to take out a reverse mortgage on the vacation home.
There is no credit report or income qualification required. The only critical requirements are age and significant equity in the home. With the recent announcements regarding second homes, it’s now possible for a homeowner to have two reverse mortgages at the same time — one on the primary home and on the second home — thereby having two sources of tax-free income. (As mentioned, more than one BNY Prime Advantage reverse mortgage is not permitted, yet homeowners could have a Prime Advantage and another reverse product).
The ability to secure a reverse mortgage on a second home also creates interesting exit options for older investors. If an investor would rather keep a property for more personal use in the future yet needs some cash from a sale, the property could be converted to a second home and the cash could be produced by the reverse mortgage. The move would eliminate the need to refinance, all future monthly payments and the need to prove you had the income necessary for the refinance.
If the second home, or primary residence, plummets in value, owners would see their equity evaporate even faster by using a second mortgage. That’s because the amount spent, plus interest, would further reduce any loss in market value. While reverse-mortgage costs and distributions can be “washed” in appreciating markets, they can quickly erode the bottom line in a down market.