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A Reverse Mortgage vs. An Equity Share Life Estate
By now most people have heard of a Reverse Mortgage, but may not understand how it works. Since the comparison between a Reverse Mortgage and an Equity Share Life Estate have some similarities, it is best to get a more comprehensive understanding of how both work.
Reverse Mortgage
A reverse mortgage is a mortgage in which the homeowner borrows money against the value of their house, either in the form of a monthly payment or a line of credit. The Homeowner is not required to pay back the money, until he/she moves out of the house, sells the property, or dies.
Reverse mortgages are designed for people who are “house rich but cash poor,” or in other words, have a considerable amount of equity inaccessibly tied up in their home. This is especially true for senior citizens (Kupuna), who oftentimes need to supplement their retirement income or pay for long-term care.
Throughout the life of the reverse mortgage, borrowers keep the title to their house, which serves as collateral for the loan. Interest is only charged on the money they receive, with both fixed and variable rates available tied to short-term indexes. Interest then accumulates over the life of the loan, until repayment occurs. The loan amount will never exceed the appraised market value of the home, and in most cases that maximum amount is 40% of the home's value. If the maximum amount is borrowed, by the 10th year, there will be no equity left to leave behind to beneficiaries. Remember, banks are in the business of making money and they make a lot of it. The longer you live, the more equity in your home they will own.
Equity Share Life Estate
A home equity sharing life estate is an agreement that allows you, the homeowner to cash out some of the equity in your home in exchange for giving an investor a shared ownership stake in the property. While the investor doesn’t have any rights to access as a tenant and can not lease out the home, it participates in the increase (or decrease), in the value of the property.
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Like a Reverse Mortgage, with a Shared Equity Life Estate agreement you don’t make any monthly payment or pay any interest. You only pay for the property taxes and maintenance of the home. At the time you pay off the loan, move out, sell the property or pass away, you pay back the investor the equity advance it gave you, as well as their percentage of the appreciation in your property value. You always keep a set percentage of your properties equity, but just sell a percentage to the Investor. You will always have a percentage of the equity that you can leave behind to your beneficiaries.
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Throughout the life of the borrower, the title to the house always stays in their name. The Equity Share Life Estate agreement gets recorded as a lien on the property and must be paid off prior to transferring the property to anyone else. If the family desires, they can borrow against the remaining equity of the home to pay back the investor. While there may be terms agreed to by investor and homeowner, the percentage of equity will be a constant throughout the life of the loan, (ie, homeowner sell 50% of the equity, homeowner keeps 50% of the equity). Term limits vary, but most investors are interested in a minimum of 5 year commitment on the loan, to gain some equity, before agreeing to a repayment.
Side by Side Comparison
