Reverse mortgages have a bad reputation. Aggressive prepayment clauses have scared homeowners away, as they don’t want to struggle to cover taxes, insurance premiums, and maintenance costs.
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However, the booming real estate business in the U.S. might prompt people to apply for reverse mortgages to –yes– invest in real estate.
Good Times For Investment?
In the last decade, several real estate markets in the U.S. have been money-focused, while many homeowners, despite the equity of their properties, are cash poor.
This is especially so among many owners above 60, who might weigh the option of borrowing against their home’s equity, to invest in real estate and secure a decent income flow.
They are also realizing that “their children or other heirs may not want their home when they pass on,” according to real estate investor Than Merrill.
“They certainly don’t seem to build houses like they used to. What are your friends’ heirs doing when they leave a property? In most cases, they probably can’t sell it fast enough.”
In this context, Forbes’ David Friedman says that growing fears over moderate-to-significant inflation will prompt people to invest in real estate.
“The institutional buyers know that with inflation, we’ll see a rise in home prices and a rise in rents, too. That’s why they’re deciding to buy residential properties now, finance them at mortgage rates that are still near all-time lows, and generate cash flow by renting them out,” he says.
Real Estate Outlook
The possibilities for reverse mortgage are something to look at, bearing in mind the rebound in Real Estate Investment Trusts (REITs). The COVID-19 recession is officially over, with the U.S. economy showing signs of a comeback through continued low-interest rates.
In 2020, the retail sector was shaken to the core by the Covid crisis, with all ten biggest REITs in the U.S. seeing their market caps decrease. However, according to Kiplinger, the current plan of the Biden administration to hike taxes could also give REIT another push.
“Changes in tax laws may make REITs more attractive due to their structure as pass-through entities that are largely immune to the impact of rising tax rates.”
As for reverse mortgages, Merrill underlines “how the equity in a home is contrasted with cashing it out to put a down payment on 10 other properties. Appreciation and equity can both work in your favor, on multiple properties.”
Is Reverse Mortgage Any Different Now?
Reverse mortgages haven’t had a good reputation, due to rapacious prepayment clauses and an alleged lack of regulation.
In the past, homeowners could find themselves with a million dollars in captive equity but were forced to pay hundreds of thousands to defray their reverse mortgages. This was due to the high cost of the product comprising several fees and closing costs, on top of mortgage insurance premiums.
In other cases, says Merrill, “borrowers far outlived their expectations and found they borrowed too much and had no equity. That made it difficult for many to sell or move when home values dipped.”
However, partner at WBK James Milano said at the NRMLA Virtual Summer Conference in July: “Things are changing and evolving … minds are opening up … I really think the biggest frustration in our industry is that it seems to be taking so long.”
The change is due to the increasing regulation and reverse mortgage programs backed by the government.
Also, lenders today cannot freeze reverse mortgage loans. This way, homeowners can use as much equity as they see fit, save for healthcare costs, and also avoid paying for a mortgage from the earned income.
Further, people can use a reverse mortgage calculator to see what their reverse loan would approximately look like, depending on the estimated value of the property, the person’s age and that of their partner, among other variables.
Recommendations
People interested in real estate investment can look into reverse mortgages, always throwing both their life plan and the small print into the equation.
According to Investopedia, you must “explore how much you could get with each of the payment options available for reverse mortgages.”
Since the product is recommended as a solution for long-term problems, it is important that people don’t have the intention to move out of their homes. It wouldn’t make sense as origination fees can hit up to $6,000 with upfront mortgage insurance equaling 0,5% to 2,5% of the property’s appraised value.
Also, people should be fully capable of covering property ongoing costs such as taxes, home insurance, and maintenance, since not being able to do so would put the lender’s collateral at risk, declaring the loan due and payable.
Further, borrowers must be at least 62 years old. “If you’re married and your spouse isn’t yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you die first, they can’t receive any more reverse mortgage proceeds after you’re gone.”
