Equity Release Vs. Reverse Mortgages

Which is best for you?

Financial planning during your retirement years can feel like a moving target.

How much income do you really need? How much can you borrow? And what happens if you can’t pay it back?

Life is uncertain. On average, we have achieved a longer lifespan than previous generations. And yet, there are no guarantees.

In response to these uncertainties, lenders have developed a number of products to help retirees access the cash they need for daily living expenses over the long term.

These products allow you to use your home as a means to access extra cash.

Some of the most popular products targeted to this need are shared equity release agreements and reverse mortgages.

In this article, we’ll break down the pros and cons of each to help you determine what might work best for you.

Equity Release

In a shared equity agreement, the lender shares in either the rising or falling value of your home.

You are not required to make any payments as long as you own your home. And if your home’s value should rise, you may be able to immediately access a lump sum payment for yourself (which could be as much as $500,000) to help pay for daily living expenses.

However, the flip side of that is if the value should drop, you may need to pay off the investor’s share of the loss.

Of course, we all like to think that the value of our home will appreciate over time. But life is uncertain, and it doesn’t always play out that way.

If the prospect of suddenly facing a payment of thousands of dollars is outside your comfort zone, this may not be the best option for you.

In addition, there may be servicing fees that go along with an equity sharing agreement. You’ll need to pay for a financial adviser, and there may be some legal fees involved as well.

Of course, there are advantages to negotiating an equity-sharing agreement. It can allow you to access needed cash. You are protected against rising interest rates, and you don’t have to make any monthly payments.

But this option is still a risky one that requires careful research into your lender and your own individual situation before making a decision.

Other Options

Home Equity Loans

A home equity loan is sometimes called a “second mortgage,” and functions in much the same way as your first mortgage did.

In this case, the lender can convert your home equity into cash, which they pay you in a one large lump sum. The amount you borrow is limited to up to 85% of the value of your home.

But if you remember what it was like to pay off your first mortgage, you will immediately see the potential downfall in this method of accessing cash. Often, senior citizens who opt for a home equity loan find themselves in deep water, as the repayment period can last for years into their retirement. The obligation of making monthly payments for the next 20 years can quickly offset the benefit of securing the initial payment. Besides that, the amount you repay is not protected from interest rates, which means you could end up paying back far more than the original loan amount.

Home Equity Lines of Credit (HELOCs)

A HELOC functions similarly to a home equity loan, but with one important difference. Instead of taking out a loan in the form of one lump sum payment, a HELOC works like a credit card. It provides you with a line of credit, with a limit set by the lender, over against the value of your home.

Unfortunately, HELOCS are unreliable and easily affected by what the market is doing. Historically, HELOCS have often been frozen or canceled during recessions.

And as with home equity loans, the necessity to make monthly payments for decades into your retirement may quickly cancel out the benefit of accessing the credit in the first place.

Additionally, it can be difficult to obtain a HELOC in the first place, since you have to demonstrate good credit and a low debt-to-income ratio to qualify.

Reverse Mortgages

As its name implies, a reverse mortgage works like a traditional mortgage, only backward.

Instead of making monthly payments, your lender makes monthly payments to you. You can also opt for a lump sum payment or a line of credit if you prefer.

The amount you receive is based on a certain percentage of your home’s value.

Also unlike a traditional mortgage, you keep the title to your home, as long as you don’t sell it, and as long as you keep up with payments and home repairs and maintenance.

The loan does not have to be paid until you either pass away or sell your home. At this point, the lender will reclaim the money they paid you. Afterward, any remaining equity in the home will go to you or to your heirs.

There are several advantages to this. One of the biggest is that it does not lock you into making monthly payments, which can quickly become burdensome as you advance further into your retirement years.

Another great perk: your FHA insurance will provide protection in case your home value drops, meaning you (or your heirs) will never have to pay back more than the fair market value of the home.

And if you are 62 or older and demonstrate the willingness to repay the loan, it’s very easy to get a reverse mortgage. Unlike equity release products, there are no restrictions based on income and credit score.

In addition, reverse mortgages are non-recourse, which means that in the event of foreclosure, the lender can’t pursue a settlement from you. This, again, is not the case with equity release products.

Compared with other financing options, a reverse mortgage is a low-risk and relatively simple way to access extra cash as you age. It’s an option well worth looking into. Find out more on www.angellaconrard.com