The Advantages and Disadvantages of an Equity Release Option

Equity release options are common in remortgages and cash out refinances. In both examples, a loan is taken in a sum larger than the remaining mortgage, if any, on a property. The difference is pocketed by the borrower for use in every day spending. The option is popular for individuals in need of emergency cash who own property but may not have a high amount of liquidity. For example, senior citizens often use equity release options to secure retirement funds. While the options can be very useful, they are also highly risky.

Advantages of an Equity Release Option

Owning equity in a home is not in itself a valuable asset. Owning a home can lock up your liquid assets. Putting equity to work allows individuals to capitalize on the years of responsible payments made toward a mortgage. It is important to remember there are two primary reasons to own a home: for enjoyment in the short-run and for financial advantages in the long-run. Without capitalizing on equity loan options, there may not be much advantage in owning over renting. Even home equity loans and real estate secured credit cards are forms of effective equity release.

Most equity release options require little repayment in the long run. This is particularly true with remortgages for senior citizens. In these options, it is common for payment to only be rendered upon death of the borrower. At that point, a life insurance plan typically is used to repay the balance owed. Senior citizens not concerned with leaving a large estate behind will gain valuable financing in the short-term. As senior citizens live long into their retirement today, retirement savings can run out long before they are needed and equity provides necessary cash.

Disadvantages of an Equity Release Option

Lose valuable equity: While equity is not necessarily useful on a day-to-day basis, it is a source of financial stability in the long run. If a borrower has a problem with too much debt, assets and equity is sold in order to cover those debts. The most prominent example occurs in a bankruptcy situation. Even if a borrower has debts too high to repay, if that borrower has enough equity to cover the debts, bankruptcy can be avoided. Once a borrower cashes out on home equity, he or she trades in the potentially biggest source of long-term financial stability and bankruptcy protection. Losing this equity can also make it harder to get new loans.

Chance of default or lack of repayment: Senior citizens are particularly at risk for unsafe equity release options. Many may be talked into trading in equity with the thought life insurance will cover the new mortgage upon their death. If this does not occur, any remaining payments must be made out of the estate. This can significantly reduce the inheritance given to an individual's benefactors. Further, if the estate is not sufficient to cover the debt, then the burden will fall on those benefactors to make up the difference.