Top 3 Equity Release Options for Those Over 60
Updated on May 20, 2024 / 4 min read
Close to the retirement period and even right after it, a considerable amount of budgeting and financial decision-making is required. Even with extensive planning, meeting goals like vacationing or renovating the home can be tricky for those over 60. To get some extra cash, an equity release is worth considering. It is a way to access tax-free funds that are tied up in your home without having to worry about immediate repayments.
Key features of equity release options
This is a financial tool that allows homeowners to get cash against the value of their property. Like many other financing options, equity release comes with interest obligations, but the payment is not due until the borrower sells the property or moves away. So, those over 60 can approach a lender willing to offer equity release options while holding the home as collateral. The amount of funds to be issued depends on the property’s current value. That said, those over 60 can typically consider three equity release options—home equity loans, home equity lines of credit, and reverse mortgages. For all of them, one is not required to move out of their home. So, one gets access to the cash value of their property while continuing to live there.
Another feature to consider here is that with most equity release options, one does not have to worry about negative equity, which is owing more than the property value.
Equity release options
1. Home equity loans
One of the most secure options, home equity loans act as second mortgages for homeowners who already have a mortgage on their property. Here, their home equity would be equal to the difference between the current value of their property and the amount pending on their first mortgage. Additionally, the amount homeowners can borrow with such a loan is usually 80% of the equity value.
A key feature to note here is that the loan applicant is typically issued a lump sum amount. So, if one wants access to the entire loan amount, these loans are worth considering. That said, the interest rates will also be charged on the disbursed amount. While home equity loans come with an interest payment obligation, the rates here are lower than those on credit card payments and personal loans. The main reason for lower rates is that the loans are secured with collateral, which is not required for personal loans.
2. Home equity line of credit
Like an equity loan, a home equity line of credit can work as a second mortgage for homeowners. That said, unlike the former option, lenders offering a line of credit allow one to borrow up to 85% of the home equity amount.
Additionally, a key difference between a home equity loan and a line of credit is that with the latter, borrowers have access to revolving credit. This allows borrowers to get fractions or small portions of the full amount instead of access to the lump sum amount. Consequently, borrowers need to pay interest only on the amount they borrow.
3. Reverse mortgages
While the other two options on the list are meant for all homeowners, reverse mortgages were originally exclusively limited to those over 60. A reverse mortgage is exactly what it sounds like, i.e., here, the lender makes monthly payments to the homeowner. These monthly payments, like mortgages, will be against the house or the property being offered as collateral. Apart from the payments, senior homeowners can choose to get a lump sum or begin a line of credit.
Owing to how it works, many homeowners over 60 consider reverse mortgages to be cash advances on their property’s eventual sale. So once the property is sold, the amount received from the sale can be used to settle the balance with the equity release lender. If the homeowner passes away before the house is sold, their heirs can sell the property to repay the lender. That said, as long as the seniors live on the property, they are not liable to make any payments to the lender. Not only that, but the funds received from reverse mortgages are also free from any taxes. This is because, according to the IRS, these funds are considered loan proceeds, not taxable income.
To be eligible for reverse mortgages, there are certain criteria that seniors must fulfill besides being a certain age.
- Applicants must use the said property as their primary residence.
- If they had purchased the home with a mortgage, applicants should have repaid a significant amount of that mortgage.
- Applicants should have enough funds to continue paying home insurance premiums and property taxes.
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