ARTICLES > All About Home Equity (Reverse) Mortgages?
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All About Home Equity (Reverse) Mortgages?
DEFINITION:
Simply explained ♦ a home equity release mortgage enables you to borrow money against the value you have in your home, up to the value of that property. ♦ it is a loan and, as with all loans, must be paid back with interest. ♦ that repayment is made when you leave the property - and that may be when you sell, move into a retirement home, or die.
The lending company will usually loan an amount that is calculated according to your age and the value of your home. If you are between 60 and about 65 you will usually be able to borrow about 20% of the home’s value. This proportion increases as you get older so that by the time you are over 85 it can be as much as 45% of the house value.
The loan may be paid out in one of three ways; 1] a lump sum, which is great if you are borrowing for a particular one-off purchase; 2] or in small regular payments that supplement your income, which is perfect if your retirement income is not enough to cover your regular expenses. That second option is no longer offered by some companies, however. This is because almost all people taking out a home equity release mortgage are doing so to pay for a substantial item for which they need one cash advance and the demand is not there for the regular income option. 3]The third way of having your loan paid out is as a line of credit or a revolving credit loan. Who’s eligible? You must own your own home because it is that home that forms the security for the loan. Usually you must be 60 years or older. There will be other criteria also to do with the value of the home, whether it is in a trust, and the like.
A few facts about Home Equity Release mortgages;
 The set-up can be expensive. Before you get your loan you will have to have your home valued. That will cost around $400. Some companies insist that you do this every five years or so. That is quite a sizable ongoing expense. Then there are the set-up fees for the loan. These can vary from around $1000 to nearer $2000. Couple that with the legal costs you will probably incur and it is getting expensive. (You can usually add the fees to your loan amount). But there is more! Companies will insist that you keep up with payments for insurance on the home, and that property maintenance is kept to their standard. And if, at a later date, you decide to borrow more money, you will be required to pay an extra fee. The irony of this is that many people need to borrow more money to keep up with the maintenance that the finance company is insisting is made to their home! What about the interest rate? This is where you can get really stung! When you take out a loan like this there is, naturally, interest attached to it. However, you are not making regular repayments. The loan is repaid in full only when the home is sold or you no longer have control over it. That means the debt grows very quickly. Your interest rate will be higher than a normal mortgage rate. Probably around 9% in today’s market. That means, if you borrow $50,000 today, in just eight years you will owe around $100,000 worth of your home equity to the finance company. Another eight years and it is $200,000 or more! This is dangerous because there is the potential for the debt to grow at a rate that is faster than the house value. That can be heartbreaking for anyone hoping to leave something in the form of cash to their family. Not only that, most companies will require the loan to be repaid if you move into a rest-home or permanent care. A lack of equity in your home may limit the funds you have available to make that move. By the way, if you die your estate usually has about six months to settle the loan but remember, interest is still being incurred in that period.
These are some of the things you need to consider;
 ♦ Is there some other way to raise the cash you require? Home equity release mortgages are expensive. If the amount of cash required is small such a loan is not worth the cost of the setup fees etc.♦ Even for a larger amount of money, it makes better financial sense, if you can afford the repayments, to take out a standard mortgage or personal loan. ♦ Alternatively, it may be that cash can be freed up by downsizing your home. ♦ Find out how portablethe loan will be. i.e. if you move home do you have to immediately repay the loan or can you attach it to your next home? Before entering into a home equity release mortgage make sure you seriously consider the effect it may have on your future, especially as regards any move you may wish to make and the capital you’ll need to make that move. Also consider how important it is for you to be able to leave something to your children in respect of an inheritance of some sort.
♦ Some companies offer what is known as a no-negative-equity guarantee which is exactly what is says; a guarantee that ensures that when you sell your home, if you receive less than the value of the outstanding loan, neither you nor your estate will have to make up the shortfall. Get professional advice in this regard if you need it.
♦ Shop around for a good deal. Make sure you read the contract well and understand exactly what the deal you’re offered really means before you sign anything. ♦ If you are on the pension (and reverse mortgage recipients usually are) make sure that receiving funds such as these do not jeopardise the receipt of your benefit. The Bottom-line: Home equity mortgages are not a bad idea but neither are they necessarily a great idea. If you have an urgent need for cash. e.g. for a surgical operation or the like then a loan like this can be perfect for your needs. However, make sure you understand the drawbacks. They are expensive, and much of the expense is invisible. That is, it is in the form of interest repayments which are constantly growing without you realising it. So, if you have no family and no one you are wanting to leave your home to you may as well spend your money before you go! In that case, a Home Equity Release Mortgage may be perfect for you. However, if you have family or others you are hoping to leave a nest-egg to, beware. If you have a need for some extra cash, perhaps a better scheme would be for those who you are wanting to leave money to to take out a loan on your behalf. That way it is like making an investment in a property that should increase in value over time.
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