Final answer:
The correct answer is a reverse mortgage, which allows homeowners to receive tax-free income based on their home equity and is repaid when the home is sold. It is often used by seniors aged 62 or older to supplement retirement income.
Step-by-step explanation:
The loan that provides a homeowner with tax-free income based on the equity of their home, and is paid back when the home is sold, is called a reverse mortgage. Unlike a traditional mortgage where the homeowner makes monthly payments to the lender, in a reverse mortgage, the lender makes payments to the homeowner. This kind of mortgage is typically available to homeowners who are 62 years of age or older and have significant equity in their homes. The homeowner's obligation to repay the loan is deferred until they no longer use the home as a primary residence, either due to selling the home, moving out, or upon passing away. At that point, the home is sold, and the proceeds are used to pay off the loan.
The options provided include the following: 1) Home equity line of credit, which is a revolving credit line secured by a homeowner's equity. 2) Reverse mortgage, which is the correct answer. 3) Second mortgage, a loan that uses the home as collateral and is subordinate to the primary mortgage. 4) Refinancing, which involves taking out a new mortgage to replace the original one, often to secure better terms.
Home equity is important as it can be the single greatest financial asset for many middle-class Americans. Building equity is one advantage of homeownership, and it can be accessed through vehicles like reverse mortgages, providing supplemental income for homeowners in retirement.