Reverse mortgage

A loan for home owners who have already paid off their mortgage but want to tap into their home’s equity

Reverse mortgages come in handy for older home owners who might have a financial hardship or who just want some extra cash without having to uproot and sell their homes.

You can either receive a lump-sum loan, a line of credit or a monthly check based on the amount of equity in your home.

This money is also tax-free, since it is a loan. When you sell your home, you use your home’s equity to pay off the loan and interest.
Keep in mind that you need to pay closing costs, such as a loan origination and processing fees.

Typically, to qualify for a reverse mortgage, you need to be over 60.

Loan-to-value ratio (LTV)

A percentage that shows how much equity a borrower will have in a home

LTV compares how much a person plans to borrow versus the property’s value. For example, a 90% LTV loan that means you want to borrow 90% of the home’s price and will have a 10% down payment (or equity if you're refinancing).
This gives you 10% equity in your property.

All lenders use LTV as a guideline to figure out if you’re a high-risk loan candidate. The higher the LTV, the more risk that a lender takes, causing them to carefully examine your finances. Also, if your LTV is over 80%, the lender requires that you buy Private mortgage insurance (PMI).

See: Down payment, Equity, Private mortgage insurance

Investment property

Any property that you buy to make a profit - either from renting or selling it

Investing in real estate can be extremely profitable venture –it is considered a long-term investment and the way to make money is to have equity, which is the money that you keep after the mortgage is paid off.

The three main ways to build equity are:
(1) your down payment when you purchase
(2) paying off the loan’s principal, which may take several years since your first years’ payments go primarily towards the interest
(3) the increase in the home’s value when the property appreciates.

Equity

The difference between a home’s market value and the amount the owner owes on the mortgage

Equity is the amount of money you’d have if you sold your home today and paid off your mortgage – it includes your down payment, all the payments you’ve made against the loan’s principal and any appreciation in your home’s value. As the market value of your home increases, so does your equity.

Similarly, if your home’s value decreases, your equity does too.

One of the main advantages of owning a home is that you can tap into the equity to use for other investments, such as a down payment on another home, college tuition or mutual funds. You bought your home 3 years ago for $110,000 with a $20,000 down payment. Your property's value went up by 3% every year and you've paid off $4,574 of your principal.

If you add the down payment, total appreciation and the amount paid off on your principal, your total equity after 3 years is $34,773.

Cash-out refinance

When home owners apply for a new, larger loan with the purpose of paying off their present loan and pocketing the difference

Cash-out refinancing lets you take advantage of the equity that you have built over the years and free up some cash to remodel your kitchen, pay your children's college tuition or pay off your credit card bills. Usually you refinance when interest rates are lower than your current loan so you lower your monthly payments. Depending on the lender, you can get 80%, and in some cases more, of your home's value.

Example: How can you use cash-out refinance to renovate your home?

Susan wants to remodel her entire living room. Her home is worth $200,000 and the mortgage balance is $125,000. Susan can refinance for $150,000, use $125,000 to pay off her current loan and have $25,000 available to get that fireplace she always wanted.

See: Refinance

Stop my foreclosure

A loan with a fixed interest rate