Equity Release – Definition

Equity release in simple terms can refer to the concept of obtaining a specific amount at one go or receiving a regular stream of income equating to the value of your house. In addition, it also allows you to retain the use of your house. The main key of the scheme lies in the fact that you receive money for your houses as well as living in the house, as long as you wish to until your death. The scheme in general works best for retired professionals or elderly individuals, who do not wish or is unable to leave the estate in the name of their heirs. In the USA, equity release is offered in the name of reverse mortgage to people aged more than 62.

Types of Equity Release

In general, terms, a number of plans are available under the scheme of releasing equity for your houses. You can choose from the basic plans depending on your needs and interests that best fits the scheme. Here is a look at some of the usual plans that are offered to facilitate the concept of equity release:

Lifetime mortgage- the most popular type of plan, this scheme secures a loan made on the home of the borrower. This loan is re-paid to the borrower or the borrowing couple at death or any such issue of moving out of the house. This loan is paid by selling the house. The borrower gets to retain his house along with the cost of ownership.

Home reversion- this scheme refers to the selling of the entire of part of the house to a third party, usually a reversion company or an individual. The borrower in turn is paid a specific amount of money either through regular monthly installments or through a certain amount at one time. In addition, they also get to retain the use of their house for as long as they wish.

Home income plan- this plan refers to the concept of lifetime mortgage that makes use of the capital to offer an income through an annuity purchase. The lender often offers this annuity purchase.

Shared appreciation mortgage- this plan offers the idea of lending a capital sum to the borrower under the scheme of getting a share of the future increase in the property value. The borrower gets to retain the ownership and use of the house under this scheme too.

Interest only- this scheme refers to the idea of taking a mortgage and repaying the capital on the death on the borrower. However, the payments of interest are made during his stay in the property.

Equity Release – Advantages

A number of advantages are related to equity release that has owed to its popularity with time among the elderly and the retired. Here is a look at some of the advantages:

It at time can reduce the inheritance tax that is to be paid by your estate

It offers a certain amount of tax-free cash or a regular monthly income for the resting period of your life

The borrowers are free to refinance their mortgages at a lower cost in the event of fall of interest rates

The plan of No Negative Equity Guarantee (NNEG) secures the borrower in case the market is down.

Equity Release – Disadvantages

Any financial plan and scheme related to capital value always comes with some risk in the business. Here is a list of some risks that you must be aware of before opting for a scheme:

It might decrease the amount of inheritance for your family

It might reduce the amount that you can donate to a charity

Equity Release in United Kingdom

The market of equity release in UK is mostly driven by two plans related to the concept of releasing equity for your property. These two plans are:

Lifetime mortgage – this plan retains the use and ownership of a property on which the scheme of repayment is based. To help the owners with the right scheme, a number of companies have come up with a calculator calculating an estimated amount of equity.

Reversion plan – this scheme requires selling off either a part or the entire property in turn of regaining the ownership of the house for the rest years of life.

In UK, the market focusing on the schemes of equity release is entirely regulated and both the plans fall under the remit of the Financial Services Authority (FSA). Before the control of FSA regulation, lenders generally took to signing a SHIP, which refers to a voluntary code of conduct with a number of guarantees.

This control and regulation of equity release in the market of UK has instigated more and more homeowners opting for the same.

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Jim Wright is a content writer on equity release schemes UK. He keeps good knowledge on the Equity release companies.

1 – Understand how your mortgage repayments work

You can’t beat a system if you don’t understand how it works, because your lender wants you to take the full 30 year term to repay your home loan, so that they receive the maximum amount of interest. That is because your repayments have been calculated using the mortgage amortisation process where each payment repays the interest calculated on the principal loan amount over the payment period, plus the amount of your principal loan which will reduce the loan amount over the term of the loan.

As a result, your mortgage repayments are comprised primarily of interest repayments, with just a small amount going towards paying down your principal. This means over the life of your loan, you could have easily repaid more in interest than your original loan was for.

However, when you pay your mortgage off faster – and you can, your lender just doesn’t want you to – you pay less interest because your additional repayments reduce the principal loan amount, and if interest is calculated on a smaller principal amount, there is less interest to pay. Therefore, your goal in repaying your mortgage faster is to accrue less interest between your repayments, and to reduce the term of your loan so there is less time for interest to be accrued.

2 – Pay more than the minimum amount

The first way you can accrue less interest is to reduce the loan amount between the times that interest is calculated by paying above the minimum monthly repayment. You can do this in a number of ways:
• Schedule a direct mortgage repayment each month for more than the minimum loan amount.
• Make direct payments to your loan throughout the month when you have funds left over.
• Pay lump sum amounts when you can from tax returns, an inheritance or a gift.
• Do all of the above for the maximum results.
• Make sure you are not charged for making additional repayments, and speak with your lender to be sure your additional repayments will be applied to the principal loan amount.

3 – Make your repayments more often

This doesn’t mean you need to increase the amount you pay again, it just means avoid waiting to make monthly repayments if you can. If you can afford to make weekly or fortnightly repayments to your mortgage you can pay off debt fast because there are more opportunities to make a repayment. For example, if you were paying your mortgage monthly, you’d make 12 repayments in a year, but if you were paying fortnightly, you’d make 26 payments, which equates to 13 monthly repayments.

Your interest goes on being calculated daily or monthly depending on your lender, but the interest has less chance to compound and can save you even more.

4 – Choose a shorter loan term

The typical loan term is 30 years which is almost an unimaginable amount of time to be paying off your home, however if you shorten your loan term from 30 years to just 15 you can half the interest you pay and save hundreds of thousands of dollars, plus you’ll own your home sooner.

For example, a $250,000 loan amount at 6.61% interest:

Over a 30 year term :
• Equals a $1,598.30 monthly repayment
• In total you will be repaying $575,387.52

Over a 15 year loan term:
• Equals a $2,192.91 monthly repayment
• In total you repay only $394,724.63

This is just an extra $594 to pay each month, less than an extra $150 per week, but a saving of over $180,000 and of course 15 years.

If you don’t want to put that sort of pressure on your finances, you can still calculate the amount you will need to repay to pay off your loan in 15 years, and pay that amount as often as you can. In the months you can’t meet the higher repayment you are still on a 30 year loan term with lower repayments, but you build up principal reductions when you can.

5 – Refinance to a lower interest rate

If you have been repaying your home loan for some time – at least 3-5 years – then you may be eligible to refinance to a lower interest rate loan. New loan products are being released all the time, not to mention interest rates change daily and there could be a different loan product or a different provider with a lower interest rate loan which suits you. Refinancing is not a decision to be made lightly, as you can pay hundreds of dollars in refinance fees, and even more if you are in a fixed rate term. Therefore, speak with your current lender first to see if they can apply a lower interest rate to your loan or recommend another loan product and waive the loan transfer fees because you are a loyal customer.

Lenders will actually be more willing than you may think to negotiate on the interest rate because while a rate may look low to you, the lender is able to play the waiting game – waiting for that interest to add up over the term of your loan. When you are charged a lower interest rate on your loan, your repayments will also be less, however, if you can maintain the same monthly repayment, this additional amount becomes an additional repayment and reduces your principal loan amount and term.

If you are in a position to refinance then you may have already repaid a significant portion of your principal loan amount. Therefore, consider refinancing to a shorter loan term at the same time because the difference in repayments on a shorter loan term is likely to be around what you are used to, but you will have slashed years off of your loan.

Before you think that paying off your mortgage faster is not worth the hassle, to save just a few years, remember that in focussing on these few tactics to loan repayment, you can save more money than you would in any savings account, and you can put that money towards your next investment.

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Alban is a personal finance writer at Home Loan Finder, where he helps people to review and compare home loans online.

So the first step for people wanting to buy a property is to sit down and determine the place or neighborhood that they would like to live in. They would have to consider factors such as distance to home and work and school of their children, as well as the community where they would be comfortable with. Then, they need to set how much they could afford to spare each month in payment for the popular mortgage loan they would eventually take. After that, the search for the right home would come next, which the whole family or a newly-wed couple or the individual could do by themselves or with the help of a trusted real estate agent.

The Internet is also a place for them to consider in finding available homes in the locality of their choice. With the information about real estates and popular mortgage companies online, they could equip themselves with the right tools in finding their dream house sooner. The local newspapers are also good venues for them to find nice homes for sale and they could easily get in touch with real estate brokers to negotiate with the price. Driving around the neighborhood with real estate agents and checking houses with “for sale” signs is also an exciting way for couples and families to spend their free weekends together.

After choosing the perfect house to live in, the application to file with mortgage banks comes next. The process could take days with plenty of paperwork. However, before the actual signing of contract loans, they should first determine their payment options for such a loan.

There are fixed rate options wherein they are to pay a fixed amount each month for the next 10, 20 or 30 years, depending on their selected option. The advantage of choosing a fixed rate is that they’ll be able to estimate their monthly budgets with the fixed rate they pay for their mortgage and other bills at home. The 30 year payment option, which is the longest, is also popular among homeowners because monthly payments are affordable. However, looking at it in the long term, the interest paid is also bigger compared to the shorter term loans. So for the shorter term loans, the monthly payments would be higher but the interest paid is lower compared to the other longer term loans.

With these considerations in place, the family or the individual could then decide for themselves the most appropriate payment options they could afford. The important thing is that after years of these monthly payments, the house which they are living now would be theirs in the long run.

Finding a home to live in is becoming easier with the advent of the internet. By surfing through the net pages, a prospective home buyer could just click through the search engines and find the location of his choice and the available properties on sale. At the convenience of his home and at his own free time, he could look into properties and get pertinent information about the neighborhood. Driving around on weekends on the said neighborhood searching for available houses would be out of his tight schedules.

If he is on a tight financial situation, he could opt to search for mortgage home brokers or mortgage bankers or directly to the wholesale mortgage lenders. As much as possible, borrowers would like to process their mortgage loans directly with the wholesale mortgage lenders because of their lower interest rates. However it is not really possible to do so because they have brokers or bankers who handle these processes for them, which makes it convenient and easy for these companies.

These two entities, bankers and brokers, are connected with wholesale mortgage lending companies who give them a lower rate and in turn they would add up a fee to these predetermined rates as their compensation for getting these customers.

The role of the brokers therefore is to choose which lender to direct his customers to. He could take care of the necessary papers for the customers and send them to the companies for approval. If ever the loan is denied, the mortgage broker could then opt to direct his client to another wholesale lender that would give his client another chance of getting the said mortgage loan.

There are mortgage bankers though who are stand alone institutions in the sense that they don’t refer customers to wholesale mortgage lenders anymore. Instead they are large enough to take these customers for their own and offer them the mortgage loans themselves, giving them payment options on long or short term basis.

The role of mortgage bankers and mortgage brokers, therefore, is to cater to the needs of home buyers and provide wholesale lenders prospective clients who will actually apply for a loan in their institution. These brokers have websites which could easily be found by searching online, and they are also available in the local newspapers. Finding a reliable broker or banker must also be one of the buyer’s homework in his search for one, as he could also be easily talked into a mortgage loan with too high an interest due to the added fee of the broker, and which he could have avoided if he found a more conscientious broker.

Because of the rising competition among mortgage brokers, the buyers are often at an advantage. They could easily find competent brokers with excellent service in many areas. The role of the mortgage lenders in all these is to offer their brokers a fast and speedy processing of loans for their prospective home buyers. And the buyers could soon live in his dream house according to the budget that he could afford.

Mortgage reduction depends on the daily balance of the loan, affecting its rate and length of paying period. There are companies offering mortgage reduction assessment for free, and they could help people decide on which options to choose that would be more beneficial for them in the long term. There are different methods they implement for their loans, such as paying for their loans weekly or fortnightly instead of monthly. Through this method, the homeowner would have to pay his loans many more times a year, but he could be shortening his payment period by many years and his interest paid would also be cut significantly. This type of mortgage reduction option works well when interest rates are very high.

Another method of reducing mortgage is by paying off some part of the principal whenever funds are available. So aside from the monthly payments, a person could use his annual income tax refund or any sizable income excess to slash some amount from the principal amount of the loan thereby making his principal balance lesser at the same time also lowering the interest incurred and shortening his loan term. Many people choose to follow this option as they could save a thousands of dollars through it. And these savings could very well go into the purchase of other important things they need in their daily lives. They could use it to remodel their house, or buy a new car, or spend for a travel vacation.

There could be other mortgage reduction options available to everyone. It is best to consult with your bank to talk about these options and ask them for an assessment which they could give for free. There are also calculators available online specific for this and people could just get an estimate of how much savings they could get and how many years they could cut off from their loans. This would give them an insight of the feasible these options are in their current financial status.

However, for people living from paycheck to paycheck, there isn’t enough to set aside for such endeavor. So their best option is to continue paying their loans monthly and on time to avoid adding late penalties to their interests. If ever something comes up or a new source of bigger income becomes available to them, then that’s the proper time to start restructuring their mortgage loans. As of the moment, they could just get consolation from the fact that in the long run and after many years, the loan will eventually be paid up and they would be debt-free from that time on.

This is through the concept of refinance loans. A refinance loan is basically acquiring a new mortgage loan in order to pay off an existing mortgage loan. Usually, this is done to lower the loan’s interest rate, to switch between a fixed and variable rate loan, or to obtain additional cash against your property’s equity. It is an option a borrower can take in the event that the terms of the original loan are no longer acceptable, given the economic situation.

Many people go for refinance loans for various reasons. One popular reason is that it can get you a lower interest rate. Although the decrease of interest rate might just be minimal, this will still translate into big savings over the life of your loan. This means you can save thousands of dollars on interest fees.

Another reason is that refinance loans allow you to modify the term of your mortgage. Doing so can help in various ways. Say you plan to change your current mortgage of 30 years into 15 years. This means, you can pay off your loan more quickly. And, you will also save on a hefty sum of interest fees. But if you’re having a difficulty coming up with the monthly payments, you can also choose to refinance a 15 year mortgage into a 30 year mortgage. Your loan is extended over a longer period, thus this will dramatically decrease the amount you have to pay every month.  However, keep in mind that if you extend the repayment period, you will end up paying more in interest fees.

You can also choose to go for refinance loans if you find yourself in immediate need of cash. A cash-out refinance allows you to use the equity in your home in order for you to get a lump sum of cash during closing. Many families often do this when they need a huge amount of cash immediately, like when they have children who are going to attend college soon.

Since refinancing is a serious matter, you would want to entrust your financial situation to experts in that field. That is why you have to consider some things in choosing the mortgage company you want to transact with.

Go for companies with a good reputation and credible background. Check the Better Business Bureau to see whether the mortgage company you have in mind can be trusted. Also, be on the watch for companies that don’t inform you about hidden fees such as appraisals, title insurance, and more. You might be shocked when closing comes and you find yourself having to pay additional fees for charges you don’t even know about. When a company tells you about the hidden fees, then you can be sure that the company values integrity and honesty in their work.

A second mortgage is a loan against the equity of a home. It may also be an extra or additional mortgage on a property that has already a mortgage. If the lender holding the first mortgage is paid, the lender having the second mortgage will then be paid, consequently. This is very risky for lenders. Hence, they tend to put high interest on second mortgages to ensure payment of debt. A property may acquire a third, fourth or fifth mortgage, but this cases are rare. Due to high interest rates and penalties, it will not be advisable to apply for a second mortgage unless re-assessment is done. An individual, who is planning to take a second mortgage, must reconsider some factors before jumping into a decision. The factors to be taken into consideration include financial stability, sustenance of payment and bank savings.

As mentioned earlier, second mortgages are being taken to fund leisure. But some are thinking of this kind of mortgage to consolidate debt or improve other properties. A house, for example, needs improvement. The owner generates money from the second mortgage to do the repair, furnishing, enhancement or even expansion of the house. The beautification of the house was able to increase its value. That is a good consolation. However, the owner must then consider the consequences of resorting to a second mortgage.

When speaking of second mortgage, people often associate it with home equity loan. Yes, they are synonymous. A value of a person’s home is usually at stake in determining how large a loan can be granted. This is the common factor.
Lenders, either a bank or a financial institution, generally ask for the following requirements when applying for a second mortgage: Significant equity in the first mortgage, low debt-to-income ratio, high credit score and solid employment history.
There are wise investments using second mortgages or home equity loan. One can purchase a new building or an apartment that can be sold or rented out, using the mentioned loans. A prudent investor will surely keep an eye on his business or properties that can be converted as a source of payment of second mortgages. When the mortgage period ends, the owner ends up with two properties. This is attainable upon smooth payment and wise use of money.

Purchasing new properties may be a good investment. But the owner must monitor interest rates direction, too, to guarantee a good investment decision. This can be done through research of trends of interest rates that are uploaded in the internet.

Conventional mortgages would require the homeowner to make a monthly amortized payment to the lender. The property equity increases after each payment. Depending on the duration of the term, the mortgage is supposed to be paid in full after the term. The property is then released from the lender after which the homeowner will then have full ownership of the property. In a reverse mortgage, on the other hand, no payment shall be made. The interest will be added to the lien of the property. Lien, in legal parlance, is actually a sort of security interest which is granted over an item or property. This is important so that a lender or an owner of a property will have security in receiving the payment of a debt or other obligation.

There are no strict requirements for people to be eligible to apply for this type of loan. There are no minimum credit or income requirements needed. However, one must be at least 62 years old as reverse mortgage are catered for seniors. They can use the money for whatever purpose they deem necessary. But there are some minor issues that borrowers must have to deal with. First, they must pay off existing mortgages (if there were any). Of course, when one is on the verge of bankruptcy, the application process will slow down. Another issue would be the type of property. There are some properties that do not qualify while some have specific requirements before the loan can be granted.

The amount of money that will be given to the homeowner is determined by the appraised value of the property, the interest rate, the age of the borrower (the older he or she is the more money he or she will get), the release of payment (whether one slump sum or monthly payments), and the location of the property. These factors comprise the Total annual Lending Cost (TALC).

The loan ends when the house is sold or when the owner leaves the property for one whole year (or 12 straight months). The reverse mortgage can then be paid through the proceeds of the sale. Qualified relatives may also opt to refinance the property through regular mortgage.

Even credit crunch couldn’t stop old people from applying for reverse mortgage. In 2006, there was a 56 percent rise for this type of loan. The trend continued in 2007. This led the Federal Government to remove restrictions on the number of active reverse mortgage loans they would underwrite at any time.

Especially in economic crisis, a homeowner can make use of home equity loans to borrow a huge amount of money. This is often only used for major financial needs such as home improvements, medical bills, and college education, and not for everyday expenditures.

But here’s the thing to watch out for. In a home equity loan, you are posting your home as collateral, and in the event that you default on the debt, the lender could take your home away. And a home is not something you would want to lose.

And because you are putting your house on the line, there are some precautions you have to take to ensure that you get the best out of home equity loans. Some lenders can trick you into paying more than you actually need to, so be aware of the tactics that they often use.

Before signing the contract, ask about hidden fees. Most lenders do not tell you about these third party fees beforehand, and without you even knowing it, you could end up paying thousands of dollars on hidden charges. Such charges could include insurance premiums and appraisal costs, among others. Some lenders can even be so tricky by charging you these fees a year after you have closed the loan. That’s why it’s wise to know all the hidden costs before you make a decision.

Ask your lender about prepayment penalties. Prepayment penalties occur whenever you pay more than the monthly payment. When you pay more every month, you can repay your debt even before your term is up. By getting out of a term early on, you will be paying lower interest charges, and this is not something that makes a lender happy. That is why some lenders charge you prepayment penalties to avoid this from happening. And we’re talking about penalties worth three months of payment, or 10 percent of the principal. This is not cheap. Especially in high-interest loans, you should have the right to get out of it quickly.

Also watch out for home equity loans that entice you with really low payments. The reason why it’s that low is that you could be paying only the interest of the loan every month. This means that the principal or the entire amount that you borrowed has to be paid at the end of the loan term in a hefty lump sum. This is also called balloon payment.

That’s why before you sign contracts, always know what you’re putting your name on. Read all documents, pay attention to the fine print, badger the lender about hidden fees if you have to, and know your rights. Remember, it’s your home on the line.

1. Mortgage Interest

If you’re filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first and second home. The maximums are halved for married taxpayers filing separately. You can’t use the $1 million deduction if you pay cash for your home and later use it as collateral for an equity loan.

2. Points

Your mortgage lender will charge you a variety of fees, one of which is called “points.” A point is calculated at 1% of the loan principal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. You cannot deduct a mortgage broker’s commission. Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.

3. Equity Loan Interest

You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as “home equity” for this deduction. Your total is limited to the smaller of:

• $100,000 (or $50,000 for each member of a married couple if they file separately), or
• the total of your home’s fair market value — that is, what you would get for your house on the open market — less certain other outstanding debts against it.

4. Home Improvement Loan Interest

If you take out a loan to make substantial home improvements, you can deduct the interest on this home improvement loan. There is no dollar limit on this deduction. However, the work must be a “capital improvement” rather than ordinary repairs. Qualifying capital improvements are those that increase your home’s value, prolong its life, or adapt it to new uses.

5. Property Taxes

Often referred to as “real estate taxes,” property taxes are fully deductible from your income. You can’t deduct escrow money held for property taxes until the money is actually used to pay your property taxes. A city or state property tax refund reduces your federal deduction by a like amount.

6. Home Office Deduction

If you use a portion of your home exclusively for business purposes, you may be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation.

7. Selling Costs and Capital Improvements

If you decide to sell your home, you’ll be able to reduce your taxable capital gain by the amount of your selling costs.

8. Capital Gains Exclusion

This is a true tax shelter for those who are treating home buying as an investment. Thanks to the Taxpayer Relief Act of 1997, many home sellers no longer suffer a taxable gain. Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks and married taxpayers who file separately get to keep up to $250,000 apiece tax free — including single people who own a home jointly.

9. Moving Costs

If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet some fairly complicated requirements.

10. Mortgage Tax Credit

A home-buying program called mortgage credit certificate (MCC) allows low-income, first-time home buyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home. You must first apply to your state or local government for an actual certificate.