Equity release mortgage means selling your house to receive cash or a steady income. At the same time, you are still allowed to live in your house. There are several situations in which this can occur, and there are advantages and disadvantages to these methods.
Lifetime Mortgage Method
A lifetime mortgage is a loan that uses the property as collateral. However, the owner does not make any payments. The owner(s) will live in the house, as long as they live. After the owners die, the property is sold. However, in some cases, it can be sold if the owner or owners are placed in a nursing cafe facility. Proceeds from the sale are used to pay off your loan. Your loan amount plus accrued interest are added together for your loan payoff amount.
There are disadvantages of lifetime mortgages, as the owner or owners must own property free and clear. If the property is not paid for, you will have to consider a second mortgage or a refinance. This can sometimes be a problem for the elderly. This also may limit your assets that you wish to pass on to your children or loved ones.
After the mortgage, you will still be responsible for your property. For example, if the roof needs repair, or you need new plumbing, you will need to fix those problems. You essentially own the house until your death, or whatever loan terms you have.
Equity release mortgage
A equity release mortgage works in the opposite way that a traditional mortgage does. With a normal mortgage, you borrow money using the house as collateral. With a equity release mortgage, someone borrows money to purchase your house, or it may be a portion of the property. You receive monthly payments on the loan, and you remain in the house. This allows you to have a steady monthly income for the rest of your life.
One of the downsides to equity release mortgages is tying up your property. If you decide that you wish to sell your house for a lump sum payment, this will not usually be possible. You will also be responsible for repairs and upkeep to your property.
Interest Only Loans
With this type of loan, you borrow money on your house. Your payments are made with interest only. You never pay any principle on the loan. Upon your death, the principle of the loan will be paid for with proceeds from its sale. Interest only loans will have some disadvantages. When you take out a mortgage, the interest is the largest amount of the payment for several years. You may not save much money by only paying interest, and in many cases your entire property will go to the lender when you die.
An equity release mortgage may not be for everyone. You need to own your property free and clear, and it may also affect assets that you wish to pass on after your death.