What is an Equity Conversion Mortgage?

The name here speaks for itself, essentially. A home owner is allowed to receive money in exchange of some equity. And by that we mean that the home owner borrows money, they don’t just receive it. We will discuss some aspects of this product below in attempt to explain properly what is an equity conversion mortgage.

In short, this service is also known as a reverse mortgage. This means that instead of using your home as collateral in order to secure a loan, you simply release some of your equity. With an equity conversion mortgage you do not pay money back each month or even each year. The debt is instead paid back after the property is sold or after the borrower(s) pass away.

There are a few more details that need to be clarified when we discuss what is an equity conversion mortgage. It is typical only for citizens beyond the age of 60 to be eligible to apply for one. Such a product can be quite useful to them because senior citizens who own homes but are cash poor can receive a lump sum and address certain needs. They can also opt to get the sum as a steady stream of cash but this is rarely the preference.

A big home renovation or a trip to Europe is no longer impossible as you can simply convert your home equity in cash without having to sell your home or mortgage it. One of the rules is that the property in question has to be your principal residence. Additionally, you cannot be delinquent on any government debt.

Once the property is sold the loan is paid back from the sale price. Keep in mind that you are likely going to have to return more money than the amount you have borrowed. This is because the interest on the loan is compounding meaning that it adds on over time.

It is in ones best interest that their home value raises in time so that they can retain more home equity upon selling. If that doesn’t happen one risks having to pay back a sum representing a large chunk of their home equity. The later a reverse mortgage is repaid, the larger the sum.

There is some good news, though. You cannot pay back more money than the worth of your home. The interest will keep growing but if it exceeds the value of the property as it is sold, the loan is capped at the sale price. This is thanks to an Australian government act adopted in 2012 which provides some extra security to senior citizens when it comes to utilizing what is an equity conversion mortgage.

It is important not to confuse the equity conversion mortgage with a home equity loan. The latter is a loan in which the borrower again gets a sum but this time they use their home equity as collateral. This means that there are regular monthly payments. This is basically a traditional mortgage.