What is equity release, and how does it work?
If you are an older property owner, you may qualify for equity release, but it is important to know what it is and what your options are before you make any big financial decisions.
Summary
Equity release is a borrowing method for older property owners to access a portion of their property’s equity without selling it.
There is one main type of equity release in the US called the home equity conversion mortgage (HECM).
The federal government insures home equity conversion mortgages.
A financial advisor can tell you more about qualifying for a HECM and how to apply for one.
What is a home equity conversion mortgage?
Equity release is a borrowing strategy that allows senior property owners over the age of 62 to withdraw some of the equity in their homes.
In the US, there is only one type of equity release, called a home equity conversion mortgage (HECM).
A HECM is a type of reverse mortgage that the federal government insures, specifically the Federal Housing Administration (FHA).
How does a HECM work?
The amount you can borrow with a HECM is based on the appraised value of the home and is subject to FHA limits.
Borrowers can choose to withdraw this money, with their options including a fixed monthly amount, a line of credit or a combination of both.
Unlike a traditional mortgage, borrowers do not have to make monthly repayments. Interest and fees are added to the loan balance each month, which means that as your balance increases, your home equity decreases.
The loan is repaid once the borrower moves out of the property. Typically, the homeowner’s heirs repay the loan by selling the property.
Who is eligible for a HECM?
HECM can be obtained from banks where the FHA sponsors the product.
However, HECMs are not available to all homeowners. Instead, you must meet a number of requirements to qualify.
The FHA sets these requirements. Under the FHA, the borrower must:
Be 62 years of age or older
Own the property outright or have a small mortgage balance
Occupy the property as their principal residence
Not be delinquent on any federal debt
Participate in a consumer information session given by an approved HECM counselor
The property you are taking the HECM out on must also meet a set of requirements.
The property must meet all of the FHA property standards and flood requirements and also be one of the following:
Single-family home or 1-4 unit home with one unit occupied by the borrower
A condominium unit in a HUD-approved condominium project or a single condominium unit approved by HUD in a non-HUD-approved condominium project
Manufactured home that meets FHA requirements
Why do people use equity release?
You can use the money from your HECM for various purposes, including home maintenance or repairs or general living expenses.
There are many reasons why a person might want to apply for an equity release from their property.
However, there are some potential disadvantages to equity release worth taking note of.
HECMs are more expensive than average mortgages as they have high origination, mortgage insurance premiums, and maintenance fees.
They also come with a high level of risk, as you may lose your home if you do abide by the rules and regulations surrounding your HECM.
Some of the reasons you could lose your home include:
If you fail to keep the property in good condition
If you fail to pay your property taxes or insurance
If the home stops being your primary residence for over 12 consecutive months
Is a HECM safe?
HECMs are a legal borrowing strategy that millions of property owners use yearly.
HECMs are the only reverse mortgages insured by the U.S. Government and are only available through a Federal Housing Administration (FHA) approved lender.
If you’re unsure about taking out a HECM, you can always work with an expert, regulated financial advisor who can guide you in the right direction. SEC-regulated and fiduciary financial advisors operate in your best interests and will help you make the right decisions when it comes to your finances.
Get expert financial advice
Equity release is a strategy for obtaining some of your property’s tied-up value without downsizing or selling it.
However, like with all big financial decisions, it’s best to get expert advice beforehand. A regulated financial advisor can review your circumstances and create a personalized financial plan that will help meet your goals.
Unbiased can match you with an expert financial advisor perfectly suited to meet your needs, meaning you’ll get the financial advice you need to make the best decisions for your future.
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