What Is an Equity Mortgage Release?

Also known as a reverse mortgage, an equity mortgage release is a type of financial arrangement that allows homeowners to make use of the equity in their homes while still continuing to live in those residences. In most nations, there are specific qualifications that homeowners must meet in order to be approved by this type of financial arrangement. For the duration of the release, the home is held as collateral, providing the lender with access to an asset that helps to keep the level of risk within a reasonable limit.

With an equity mortgage release, the homeowner is able to receive a portion of the equity in the home in the form of cash disbursements. The frequency of those payments will vary, based on the contractual terms and conditions that govern the reverse mortgage. One of the more common approaches is to supply the homeowner with a set disbursement on a monthly basis, effectively creating an income stream that can be used to augment funds from pensions or other retirement programs and allow the homeowner to enjoy a comfortable way of life during his or her later years. With most equity releases, any equity remaining in the property at the time the homeowner passes away is made available to the heirs, and the lender assumes ownership of the property, unless those heirs choose to repay the disbursements and settle the release with the lender.

Since an equity mortgage release is often used as a means of providing assets for the retirement years, most programs of this type do require that the homeowner be over the age of 55. The homeowner must also normally have a solid credit rating, and the property in question must be well-maintained. Assuming that the owner and the real estate meet the basic criteria, the lender and the homeowner will determine the amount and frequency of the disbursements according to a specific timetable. Typically, the idea is to supply the homeowner with a steady flow of cash for his or her remaining life expectancy. For this reason, some financial analysts will urge clients to wait until actual retirement to initiate an equity mortgage release, effectively ensuring that those disbursements are for larger amounts throughout the owners' remaining years.

While an equity mortgage release is a viable approach to creating a revenue stream for retirement, the approach is not ideal for everyone. For this reason, consulting with an estate planner before entering into this type of arrangement is a good idea. The planner can help evaluate the existing financial preparations made by the homeowner and offer constructive advice on whether a reverse mortgage would be wise, or if other income streams are likely to be sufficient for the owner to maintain an equitable standard of living after retirement.