How You Can Tap Into Your Home Equity

There are many people in the U.S. whose wealth is tied to their house. These are usually homeowners who are nearing or already in their retirement years. Aware of their home equity, they look for loan products that will allow them to obtain cash, and enjoy their retirement even more. Reverse mortgage is one of such loan products. With this type of loan, no monthly payment is made, but the mortgage becomes due when the homeowner passes away.

If you're thinking about tapping into your home equity, here are a few things that you need to consider first.

Why do homeowners turn to reverse mortgage?

As mentioned earlier, the vast majority of homeowners are wealthy because of their house's value. According to a 2013 study conducted by the Center for Retirement Research at Boston College, most working households have a $110,000 balance on their IRA or 401(k) accounts prior to retiring. This is mainly because they've been repetitively withdrawing money from those accounts during their employment years.

In comparison, the Consumer Financial Protection Bureau (CFPB) stated in a recent paper that American homeowners hold $3.84 trillion in home equity. Given these statistics, it's not surprising that many homeowners are finding reverse mortgage appealing. Currently, the reverse mortgage market accounts for a tiny percentage of all mortgages, but its share is set to rise over the next years as more people are retiring and exploring home loan products.

Are you eligible for reverse mortgage?

Eligibility requirements include:

  • Being at least 62
  • Having equity in your home

What are the dangers associated with reverse mortgage?

Under a reverse mortgage contract, the lender is entitled to claim its money if one of the following situations apply:

  • Death of the homeowner
  • The house is sold
  • Relocation

The first scenario is the one that has been causing the most concerns among homeowners. Imagine you're living with your spouse and suddenly pass away because of an illness, your spouse will soon find themselves homeless since the lender will add your home to the local real estate listings. The same thing is also true if your kids are still living with you. The source of the problem is that lenders refuse to include spouses or heirs in reverse mortgage contracts. Although angry dependents brought this issue to the CFPB, no real solution has been found yet.

The CFPB strongly recommends that before signing this contract, you take the time to come up with a plan for your non-borrowing spouse and/or children.


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