Reverse Mortgages for Second Homes Gain Momentum

Aaron Crowe
Written by
Aaron Crowe
Read Time: 2 minutes

Until recently, reverse mortgages for primary residences were only available through a few regional banks. However, some national lenders have started 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.

Reverse mortgages have been gaining popularity. And it's no wonder, once you understand how they work. A lender makes a payment, or a series of payments, to the homeowner, based on the value of the equity in the home. In other words, it's a cash advance (on which interest is paid) based on the equity in your home.

Reverse mortgage funds can be distributed in a lump sum, through regular monthly payments, as a line of credit, or through a combination of such options. The homeowner doesn't make monthly payments to the lender and cannot be forced to sell his home or move away. This arrangement continues until the homeowner either dies or decides to sell the home. At that time, the loan amount, plus accrued interest, is repaid through the sale of the home. The borrower isn't responsible for more than the value of the home, which guarantees that heirs don't have to pay a penny. If the home has lost value, for example, the mortgage company is forced to endure the loss.

Time for seconds

Historically, reverse mortgages have been allowed only in connection with a primary residence, to let older homeowners withdraw equity for a steady flow of monthly income. With lenders now beginning to permit more reverse loans on second homes, though, this type of mortgage arrangement should prove to become exceedingly popular.

A reverse mortgage on a second home could make much more sense for homeowners than refinancing through a second mortgage or using some other tool for tapping equity. It would allow people who own more than one home to protect their primary residence from the risk of using it as collateral. If you refinance your home and then fail to make payments, you could face foreclosure. But taking out a reverse mortgage poses no risk of foreclosure, because there are no payments made to the lender. Meanwhile, your second home can provide a steady stream of income, which further ensures that you'll be financially strong and stable during retirement.

A boom for boomers

People who can benefit immediately from reverse mortgages are senior citizens and members of the so-called baby boomer generation, who are now approaching retirement age. Baby boomers number approximately 78 million and account for almost 30 percent of the U.S. population. The first boomers will turn 62-the year that homeowners can legally qualify for reverse mortgages-in 2008. According to a recent survey conducted by the National Association of Realtors, 25 percent of boomers own at least one home in addition to their primary residence, and are the largest retirement age segment in the history of America.

Like what you're reading? Subscribe to our top stories.

No spam. We take your privacy seriously.

Follow us on Twitter and Facebook.