As you pay down your mortgage, the amount of money you’ve paid is referred to as the equity of the house while the remaining money that has to be paid is your debt.
Once you’ve paid off the mortgage, you have the entire value of the house stored as equity. It isn’t uncommon for people to be house-rich and money poor however, this makes releasing the stored equity of your home appealing to many people in need of cash flow. Many banks offer equity release packages in which some or all of the house’s equity is loaned back to the homeowner at a certain interest rate. Unlike a regular loan, this debt is paid upon death when the bank sells the house to make back what they loaned out. The interest rate on the loan equity compounds quickly and very often the banks take much more than the original amount lent, this is why they offer the package in the first place.
But what about some of the more nuanced aspects of equity release? Well, let me explain:
You Don’t Have To Have Paid Off Your Mortgage
This offer isn’t just for those who want the full value of their home after they’ve completed paying off their mortgage, any amount of paid equity can be loaned back to you. Whether or not it is a good idea for you depends on personal circumstances, people usually ask is equity release a good idea, as there’s a lot that goes into choosing whether or not it is right for you. Small amounts can be loaned back to you which increases the chances that you will be able to pay off the loan with only a small portion of the eventual proceeds of your home, leaving much more money available for your estate. Just remember that if your mortgage isn’t paid off that you’ll still have to make the monthly payments, your mortgage does not disappear once you release equity.
You Still Live In The Home
Part of any equity release agreement is that you continue to live in the home and make all of the payments with regards to property taxes, water & electricity bills, and other miscellaneous offenses. You will stay in the home until you pass away or go to an assisted living center. For many people this allows them to stay in the home they love long after their pensions have dried up and they’d have otherwise have had to move away.
The Money Is Tax-Free
Any equity you pull from your home is tax free, unlike the money you’d make from selling the home. People who don’t have significant funds to give away to their descendants often use equity release programs to take money out to leave for their children after they pass. If you hold on to the money there is a chance you will eventually have to pay taxes on it for reasons unrelated to home equity, but any quick payments will skirt past government interference easily.
Look For No Negative Equity Guarantees
A no negative equity guarantee protects you and your family from having to pay extra money if the amount you owe is larger than what the bank will make from the house’s eventual sale. This means that anyone who stands to receive money from the sale of the house (if any is left) will not have to pay out of pocket because of your decision to release equity.
This type of financial arrangement allows many people to live their lives relatively disturbance free and also pass on some of their accumulated wealth to their children. Since you still get to live in the home, it removes the need to downsize due to financial troubles and functionally allows you to live more or less the same life you’ve become accustomed to. The sooner you take out the loan the more you’ll end up having to pay back, so ultimately it is recommended to release equity when you are in a bind or when you have a sober appraisal of how many years you have left so you can estimate how much interest will be added to your loan by the time you pass. While it might seem like it, equity release is not “free money”. Interest rates are much higher on equity release plans and there is no option for monthly payments, so the amount owed can balloon significantly. Still, for many people the idea of possibly making $0 on the eventual sale of the home after they’ve died doesn’t bother them because they’ll be too dead to worry about it themselves.