Equity release is a way of keeping rental or use of an asset that has an asset value, with the difference being the net value at the time of release. In other words, you are gaining money by renting out your asset but not actually having to pay interest on it. If you were to lend the money, you would be paying interest on the money, and not the rental value. This can be a really useful method of saving for investments or retirement, but it must be used in a careful and considered manner. There are a few things that people should know about the process.
First, as a general rule, any investment that gives back more gain than loss is potentially significant. An obvious example is the stock market. However, even the prices of most products are not truly reflective of their true worth because they are affected by a number of factors, such as supply and demand, among others. Real estate is not like that, as prices are tied to the economy. Therefore, it is possible to increase the worth of an item or service through equity release, but only if and when it appreciates enough to give back a profit. Conversely, a person who does not release equity into a savings account or apply for another loan will lose a great deal of money in terms of compound interest.
However, there are some situations where equity release is not only potentially significant but absolutely essential for overall financial health. For instance, when someone takes out a mortgage to purchase a home, the payment represents a large portion of their monthly income. If the mortgage payment is high over time, this represents a potential loss of wealth over time. Therefore, homeowners who take out shared appreciation mortgages represent a potentially significant risk because they will potentially lose a large amount of money in the event of a default.
On the flip side, a homeowner who borrows against his equity release can potentially benefit from lower monthly repayments as well as lower interest rates than he might have paid if he had not taken out the loan. Indeed, many lenders offer substantial discounts on the interest rate that one borrows against, which could translate into significant savings over the long run. This type of equity release is particularly attractive to borrowers who are concerned about ongoing interest rates, but who do not want to risk losing money if they take out the loan.
Another situation where it makes sense to borrow against equity release comes during mortgage refinancing. Homeowners may want to borrow against their equity release for one of two reasons: to consolidate debts that would otherwise not be covered by refinancing, or to obtain better rates on the new mortgage. Many people opt to borrow against their equity release during a refinancing because they can usually get better rates on their new mortgages. If a homeowner borrows against their equity release during a refinancing, however, they run the risk of losing the benefits of their better rates, as the lending terms for the new mortgage may require them to pay out more in interest than the new loan will cost.
As with any financial decision, it’s important for homeowners to weigh all of the options carefully before choosing the path that is best suited to their individual financial goals and circumstances. There are many benefits to taking out an equity release. Indeed, it can allow borrowers to achieve their financial goals, such as buying a new home or consolidating existing debt, at a lower cost than they might otherwise. However, homeowners must remember that there are risks involved when they take out a loan against their house that relies on house prices interest rates to make up the difference.