Once the object of derision among financial professionals, reverse mortgages have come into their own in the current financial landscape. As more and more homeowners choose this option to collect an advance on their equity and put off repayment until a home’s sale, the reverse mortgage is increasingly being seen not as a stalling tactic for the financially unprepared, but a vital tool in the savvy real estate investor’s strategy set.
Typically reserved for older homeowners, the reverse mortgage is a special kind of loan that taps into the equity, or accrued value, of a piece of real estate to provide the borrower with a steady income stream. Since the loan is based in already-existing equity, the bank can make calculations based on the property’s price appreciation, current mortgage terms, initial length and other related factors to create a loan that will not exceed the home’s valuation over its lifespan.
A few rules do apply: as mentioned, reverse mortgages are generally only given to property owners over 62. Additionally, no liens or encumbrances may be currently enacted against the property. If any such claims exist, the loan will first go to paying those off before being dispersed to the borrower.
So why the shift from “fallback plan” to “legitimate investment strategy”? A few different factors. First and foremost, the 2008 financial crisis did a lot in terms of normalization: as borrowers saw their retirement evaporate before their eyes, there was a mass scramble for solutions of all sorts. As reverse mortgages became more common, they became more publicly understood and thus more acceptable.
Another important shift was the Reverse Mortgage Stabilization Act of 2013, which mandated that a chunk of the equity — about 40% — was to be made unavailable until a year after the initial loan. The banking system also implemented an assortment of regulations that ensured reverse mortgage borrowers were willing and able to pay insurance and taxes on the property, as well as protecting spouses not on the loan.
Acuity National Real Estate Solutions’ team of financial and real estate professionals can act as a bridge between lender and borrower to streamline closings on a variety of transactions, from reverse mortgages to new home ownership and much more. Visit our homepage to find out more about our comprehensive suite of escrow, title, real estate technology and related services.