Home Equity Lending Making A Comeback, But Is It Right For You?
Home values are starting to rise again, and so is home equity lending. While more lenders are making loans, is tapping the equity in your home the smart way for you to augment retirement income? Given that equity in a home is the largest single retirement asset for many seniors, you need to protect it the best you can. Here are some important questions to ask before applying for a loan:
- How are you going to use the money? If you need to make repairs, or some other type of home improvement that increases the value of your home, that's generally a good use of the funds. If you're considering the funds for debt consolidation, medical expenses, or to supplement your Social Security income while you stay in your home, get unbiased financial advice first from someone other than your lender. The National Council On Aging has a good website called the Home Equity Advisor that can help you think through your issues, and find a mortgage counselor, as well as providing links to resources that can help.
- What expenses shouldn't be financed with a home equity loan? Despite the ads, using home equity loans to go on a shopping spree, take a vacation or to buy a new car is frequently not recommended. These are discretionary purchases that don't increase in value, but can burn through the equity that took you so long to build up in your home.
- How much can I borrow? The amount you can borrow is usually based on the current appraised value of your home minus any current outstanding balance on your mortgage. What's left is the equity in your home. Lenders will want you to own more than 20% of your home before you can even qualify. You can get an estimate of the value of your home using www.zillow.com website.
- What type of loan do I need? There are three major types of home equity loans for seniors. A refinancing allows you to pull out a cash lump sum all at once. Borrowers select a period of time, usually 15 to 30 years, and a fixed monthly payment. There are both fixed or variable interest loans. Home equity lines of credit allow you to borrow smaller sums only as you need them, and can allow flexibility in payments. These generally have variable interest rates, however, that can rise several times a year, based on the prime rate. Unlike younger consumers, seniors also have reverse mortgage options. Reverse mortgage may sometimes be good for seniors who plan to continue living in their home. Unlike conventional mortgages, there are no income requirements to qualify. You don't need to make payments as long as you continue to live in your home. When you move out, the mortgage becomes due. Under new federal guidelines, however, these loans have become far more expensive than conventional mortgages.