Before deciding to release equity from your home, it is important for you to determine whether or not it is the best financial move for you. Home Equity Release through a reverse mortgage or home equity line of credit can be a good move in certain circumstances and is not the right decision for everyone. In this article we’ll discuss releasing equity from your home pros and cons

Pros of Releasing Equity From Your Home

There are several pros to releasing equity from your home. Here are some of the advantages.

  • Lower Monthly Payments and Less Stress on Fixed Income

As we get older, we often rely more and more on fixed income. This is money that we can generally count on each month. In many cases this fixed income does not increase with inflation or cost of living. One advantage of a reverse mortgage is that it allows you to access home equity without having to make monthly payments. This can provide senior citizens with the opportunity to lower their monthly expenses, reduce stress and plan ahead for future financial situations that may arise.

  • Increase Liquidity of Assets for Inheritance or Other Financial Goals

Found money allows you to use some of your home’s equity now to access cash or treat yourself. It is not necessary for this found money to be spent on maintenance or bills, it can be used as a way to increase liquidity of your assets in order to purchase things like cars, vacations, boats, etc., or work towards other financial goals.

  • Unlock Value of Retired Life

Another reason to consider using a reverse mortgage is that it allows you to unlock the value of your retired life for things like specialized care, medical emergencies and other unexpected expenses. Instead of having to sell off assets, use the equity in your home as funding without losing ownership.

Cons of Releasing Equity From Your Home

There are also disadvantages to unlocking equity from your home. Here are some cons of releasing equity from your home.

  • Interest Rate on Reverse Mortgage is High

Reverse mortgages can have higher interest rates than other types of loans. The reason for this is that they are considered high risk, non-recourse loans which mean that if you die or sell your home before the loan has been paid off, then it becomes the responsibility of the lender to pay back their money.

  • Home Value May Not Remain High

As we age, our health may decline and this can affect our ability to maintain our homes. If you live in an urban area where land value has appreciated significantly over time than now might not be the right time to release equity from your home due to the chance that it will decrease in value faster then what you expected. By using a reverse mortgage or home equity line of credit, then the government will insure that you get a fair rate and your home gets appraised at its current value.

  • Interest on Reverse Mortgage is Added to Principal Balance

Because reverse mortgages are non-recourse loans, any interest accrued during the life of your loan is added to your principal balance. This means that if for whatever reason you were unable to make monthly payments or ended up having to sell your home (or died), then the lender would add all of this interest onto what you owe them. While most lenders do not require monthly repayment in order to maintain ownership of the home until it is sold, but it can affect how much equity can be released from your home in total.

Conclusion

Although it is beneficial in some circumstances to use the equity released from your home, you should always weigh all of your options before making a final decision. It’s best to consult with a financial advisor, especially if you’re close to or in retirement. Read more about equity release here.

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