An Extra Cash Lift
Saturday, June 9, 2007
Reverse mortgages for second homes, until now available through a handful of small regional banks, 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, is expected to roll out the second-home wrinkle as soon as the purchase is completed this summer. BNY Mortgage, which recently introduced the first jumbo fixed-rate reverse mortgage, 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 chief operating officer of Reverse Mortgage of America, a division of Seattle Mortgage. "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, reverse mortgages have been made to homeowners 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 in a lump sum, regular monthly payments, a line of credit or 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.
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.
With a reverse mortgage, the parents could receive a needed monthly draw, lump-sum payment or line of credit. When the parents die or transfer title to their children later in their lives, the children 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 age 62, he or she 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. It's now possible for a homeowner to have two reverse mortgages simultaneously, thereby having two sources of tax-free income.
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. As well as eliminating monthly payments, the move would erase the need to refinance and the need to prove you had the income necessary for such refinancing.
If the second home, or primary residence, plummets in value, owners would see their equity evaporate even more quickly by using two reverse mortgages. That's because the amount spent, plus interest, would exacerbate 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.