Understanding Equity Release on Your Home: The Pros and Cons Explained

Key Takeaways

• Equity release is a term more commonly used internationally when referring to accessing your home’s equity.
• In the U.S., homeowners often release equity through HELOCs, reverse mortgages, cash-out refinancing, and home equity agreements.
• Equity release gives you access to a lump sum of cash when you need it (such as in retirement).
• To avoid some of the drawbacks of releasing equity, like closing costs and foreclosure risk, consider an alternative method like a home equity agreement (HEA).

Have you run across the phrase “equity release” and wondered whether it applies to your situation? Equity release is a term you’re more likely to hear in the U.K., Australia, and other international circles. It describes a way to access, or “release,” the equity in your home without selling it.

In the United States, the equivalent of an equity release would be a loan or line of credit that gives you funds up front in exchange for a payment later. For example, a reverse mortgage would be a type of equity release available in the U.S.

Learn more about releasing the equity in your home, including its advantages and drawbacks, as well as other options to consider.

What Is Equity Release?

Equity release refers to accessing and using the value built up in your home without selling it.

If you sold your home, you’d receive the value of your home in cash from the buyer – but then you’d have nowhere to live. Equity release means you can use that value but remain the owner.

When you release the equity you’ve acquired in your home, you gain access to a large source of cash you can use to cover unexpected expenses, supplement retirement income, or nearly anything else. The catch is that you’ll eventually need to repay that sum of money, usually by making monthly payments.

How Does Equity Release Work on Your Home?

The mechanics of equity release vary depending on which method you use, but the basic idea is this: as you pay down your mortgage and your home grows in value, you gain equity. Equity is the portion of the home you own outright, as opposed to the amount you still owe your lender. You’ll typically need at least 20% equity in the home to release any of its value.

To release your equity, you typically enter an agreement with a lender or other financial institution. They’ll give you access to funds, backed by the understanding that you’ll repay the funds later. If you don’t repay the equity you’ve tapped, the lender could take your home.

Releasing equity is especially useful for retirees, who often have plenty of equity in retirement but not necessarily a lot of cash.

Common Equity Release Options in the U.S.

In the U.K., equity release typically comes in the form of a home reversion or a lifetime mortgage. In the U.S., people commonly access home equity using one of the following methods:

Reverse mortgage

A reverse mortgage or home equity conversion mortgage (HECM) is a type of mortgage that allows you to release the equity in your home through a loan. Each month, the amount you owe your lender grows, but you don’t owe monthly payments. Instead, you repay the loan when you sell the home or move into an assisted living facility. Reverse mortgages give you access to money now in exchange for repayment in full later. They’re typically only available for homeowners aged 62 or older.

HELOC

A HELOC, or home equity line of credit, is a revolving credit line. You borrow money up to your credit limit during the draw period, making interest-only payments. You then pay back what you borrowed during the repayment period. HELOCs use your home equity to secure the loan, and usually give you 10 years to draw on your credit line [1] and 20 years to repay it. They don’t usually require closing costs.

Cash-out refinance

With a cash-out refinance, you refinance your mortgage for more than your current loan amount, then take the difference in cash. Cash-out refis, as they’re also known, replace your current mortgage with an all-new mortgage. This new mortgage will have a new interest rate, loan terms, and monthly payment amount, and you’ll need to pay closing costs, as you would with a regular mortgage.

Home equity agreement (HEA)

Home Equity Agreements, or HEAs, provide access to a lump sum up front in exchange for a share of your home’s future value. There are no monthly interest payments, and you keep your current mortgage rate. Home equity agreements typically offer more flexibility than other methods of releasing equity.

Pros of Equity Release

Homeowners appreciate being able to release equity for several reasons, including:

• Access to cash: Releasing equity gives you access to money you can use for all sorts of purposes, from covering everyday expenses to financing special projects.
• No need to sell: Selling your home also lets you cash in on its value, but leaves you with no place to live. Equity release means you can stay in your home.
• Tax-free income: When you release the equity in your home as cash, you typically don’t pay tax on it. That means you hang on to more of the funds you need.
• Benefit from appreciation: If your home has appreciated in value, releasing equity gives you access to that additional value.

Cons and Risks of Equity Release

However, equity release isn’t right for everyone. Some of the drawbacks include:

• Fees and closing costs: Depending on your chosen method of equity release, there may be some required fees and expenses, including closing costs. These costs can take away from the equity you’re releasing.
• Foreclosure risk: With methods such as HELOCs and cash-out refinancing, your home is on the line if you fail to repay.
• Interest rate changes: HELOCs and cash-out refinancing may also come with higher interest rates. It depends on the current interest rate environment as well as your personal financial situation and credit score.

Alternatives to Traditional Equity Release

Instead of traditional equity release methods, you could consider alternative ways to access equity and meet your goals.

Downsize: For example, instead of staying in your current home, you could sell it and use any equity you’ve built (beyond what you owe on your mortgage) to purchase a smaller home. Downsizing can be useful if you find you don’t need as much space as you used to. On the other hand, higher home prices can make it difficult to find a home that suits both your needs and your budget.

Rent a room: If you prefer to stay in your current home, renting out a room could be a way to boost your income without selling. If you’re considering sharing your home with a stranger, make sure you have an ironclad agreement in place to protect your rights and privacy.

HEA: A home equity agreement from Unlock is a more flexible way to unlock home equity without selling your home or taking in a tenant. HEAs offer a lump sum during the agreement term, with no monthly interest payments.

At the end of the term (or before that, if you prefer), you’ll settle the agreement and complete the contract. Homeowners often settle a home equity agreement by selling the home, buying out the agreement with cash on hand, or financing the buyout amount with a separate loan. Most HEA or home equity investments, as they are sometimes known, carry a term of between 10 and 30 years.

Conclusion

Years of home appreciation gains mean today’s homeowners are enjoying unprecedented levels of home equity. Releasing that equity also releases financial flexibility, providing new opportunities to meet your goals.

Unlock’s home equity agreement offers a solution for homeowners who don’t want to take on monthly payments. With an Unlock HEA, you can access your home equity without giving up a low mortgage rate. It’s also ideal for seniors, retirees, and others who have a good deal of home equity but not a lot of cash. Explore Unlock’s home equity agreement and see whether this option is right for you.