What is equity release?
If you’re in the U.K., equity release is a specific type of mortgage. Here in the U.S., it can refer to reverse mortgages or, more generally, just the act of accessing your home equity while you
still own the property.
While reverse mortgages are reserved for a homeowner 62 and older, other equity release plans can be used by property owners of all ages. We’ll take a look at both options in more depth below.
Equity release mortgages = reverse mortgage
Equity release mortgages in the U.K. come in two forms: a lifetime mortgage and a home reversion mortgage. With the lifetime mortgage, you can draw funds from your equity as needed, while a home reversion mortgage involves actually selling a portion of your equity in exchange for a cash lump sum.
In the U.S., reverse mortgages work much like a lifetime mortgage. They’re reserved only for homeowners 62 and older (the earliest you can retire and take Social Security), and they offer you a lump sum or fixed monthly equity payment from your home. This allows retirees to enjoy a regular income stream once they stop working.
There is no monthly payment on a reverse mortgage, and the balance doesn’t come due until the borrower dies or sells the home.
Disadvantages of reverse mortgages
Reverse mortgages can seem like a good way to make a regular income while you’re in retirement, but they’re not without drawbacks. A big problem with these loans is that they effectively reduce the value of your equity, since you use a portion of it toward interest and other loan fees. (Put simply, you get less for your money.)
They also impact your family’s inheritance. When you pass, your heirs will need to sell the home and repay the debt. Though they will take home the difference between the sale price and the loan balance, there may not be much left over at that point -- especially if you’ve been drawing on the loan for many years.
Finally, they could pose problems with other retirement plans. The income you earn from your reserve mortgage could impact your Medicaid and Supplemental Security income eligibility. Additionally, if you move into an assisted care facility and your non-borrowing spouse remains in the home, you could be in violation of your loan contract (i.e., you likely wouldn’t be considered a resident and would need to pay off the loan or sell the property).
Other forms of equity release
If you’re not 62 or just want another way to tap into the equity you have in your property, there are many other ways to do so.
Here are just a few:
- Home equity loan: A home equity loan is a type of second mortgage. You’ll get a chunk of your home equity as a lump sum and then pay it back monthly in addition to your primary mortgage payment.
- Home equity line of credit: A home equity line of credit, or HELOC, is a credit line based on your home equity. You draw from it as needed for a set period of time (often 10 years), and then repay the balance once that period ends. It functions much like a credit card.
- Cash-out refinance: This is a method of refinancing your mortgage loan and replacing it with a new, higher-balance one. You then get the difference between the two balances in cash.
- Equity sharing: Equity sharing is a new option that allows you to sell off a share of your equity and future sale profits to an investor. Companies like Unison, Point, and others offer this type of arrangement.
Another option for leveraging your home equity is to sell and downsize (or even rent). This could be a particularly good option in today’s market, when home values -- and home equity levels -- are highly elevated.
What’s the right move?
Home equity is incredibly valuable, especially for older homeowners. If you’re not sure which equity release option is your best bet, talk to a financial adviser before making your decision. A mortgage broker can also help you weigh your equity release plan options, as well as the costs they come with.
Finally, talk to your estate-planning attorney or tax advisor to ensure the move fits with your overall retirement plan.