Reverse Mortgages: Tapping Equity for a Second Home

Do you have clients who want to buy a second home but who are hesitant given the current market conditions? Now you can offer your clients another solution when it comes to financing their dream vacation home,. The answer: reverse mortgages.

New data from the Department of Housing and Urban Development (HUD) reveals that more than 300,000 seniors have used the federally insured Home Equity Conversion Mortgage or Reverse Mortgage, to convert the equity in their homes into cash without having to move. Even though this is a significant number, it represents only about one percent market penetration. In the first quarter of 2007 alone, there was a $19 billion increase in senior home equity. This increase was reflected in a 0.4 percent increase in the Reverse Mortgage Market Index (RMMI) to 205.6 from 2o4.7 in the previous quarter.

The RMMI is a new quarterly index, launched in July 2007, created to measure the proportion of reverse mortgages in the overall mortgage market, The index reflects the current value of senior home equity in the U.S. It’s the first market indicator that collects critical market, housing and demographic data to track and project reverse mortgage market potential. The index takes into account the demographic shift as baby boomers begin to turn 62. The average home equity in a senior-owned household today is estimated to be about $230,000, according to the Hollister Group of Washington D.C. that helped to create the index, with assistance from National Reverse Mortgage Lenders Association (NRMLA, http://www.nmrlaonline.org).
According to the RMMI, the amount of home equity held by U.S. homeowners aged 62 and older grew by an estimated $19 billion in the first quarter of 2007 to $4.3 trillion. By 2030, senior home equity is forecast to grow to $37 trillion.

What do these statistics mean for the real estate industry? It shows that there is a large pool of equity available to baby boomers. A significant proportion of this equity may well end up being used by boomers to purchase second (or third or fourth) homes. If you position yourself and your firm as an expert in how to tap your client’s equity via a reverse mortgage, your company could gain more clients and sales that will be derived from this growing market segment.

Until recently, reverse mortgages have been used almost exclusively for primary residences and were only available through a few regional banks. There is a new trend emerging, with more lenders entering the market, including some national lenders offering them for second homes, as well. The trend may offer a welcome alternative to refinancing for those who want to extract equity from investment property without selling it. With lenders now beginning to permit more reverse loans on second homes, this type of mortgage arrangement should prove to become exceedingly popular.

A reverse mortgage to purchase a second home could make much more sense for your clients than refinancing through a second mortgage or using some other vehicle for tapping equity. It would allow your clients who own more than one home to protect their primary residence from being used as collateral.

Unlike traditional second mortgage financing, taking out a reverse mortgage poses no risk of foreclosure to your client, because there are no payments being made to the lender. Meanwhile, your clients second home can provide a steady stream of income, which further ensures that their retirement years will be more financially secure and stable.

For more information visit:

http://www.reversemortgage.org/

http://www.ncoa.org/content.cfm?sectionID=11&detail=1659

This article was originally published in the Winter 2007 issue of 2ndhome® Specialist, a digital magazine for real estate professionals specializing in the second home and resort markets.