Do you know how to use home equity (HE) in your best interest? Here’s what experts recommend you do!
With scary housing market conditions and high interest rates, home equity products have become one of the most popular financing methods recently. As we all know, home prices tend to get higher and higher, leaving a surprising number of homeowners with big equity to tap.
Besides that, experts say that interest rates on credit cards went south, with the average rate above 21%—it’s pretty crazy if you think about it. Speaking of that, home equity products are far cheaper as financing options because they usually have significantly lower rates than home equity loans, which now have rates averaging between 8% and 10%.
If you take a closer look, you’ll notice that this method is helpful for seniors because they can quickly see the benefits. It can bolster your retirement income but can also be used for several purposes, such as making your house more accessible, paying off debts, or even assisting your grandkids through college. If you want to make the most out of it, here’s what experts recommend you do:
1. Loans and HELOCs
Home equity loans—a type of second mortgage—are a great way seniors can borrow from their HE. These methods provide a one-time payment at closing and require regular monthly payments from the beginning of the loan (these are typically used by seniors who are lucky to have a reliable income).
HELOCs (home equity lines of credit) are another option for older Americans, as professionals say. Thanks to this, your equity is turned into a credit line that you can withdraw money from, usually for 10 years. Experts say it’s a revolving line of credit. You can withdraw funds, make payments, and then use the funds again. Think of it like a credit card, but don’t forget that the collateral is your home.
HELOCs can be a great option when you are unsure about the amount you’ll need or if you require long-term access to funds, such as for home accessibility improvements. Moreover, if you have a fixed income, they usually only ask for interest payments for the first 10 years of the loan. In my opinion, this is a good way to ease your financial burden.
2. Reverse mortgage
Another fantastic way for older citizens to tap their home equity is with the help of a reverse mortgage. Thanks to these loans, you won’t have to make monthly payments but instead get paid (out of your HE) by your lender. You can either opt for a monthly payment or one lump sum. Moreover, you can also choose a line of credit you can use in case you need it.
With this method, the homeowner remains in the home and doesn’t need a mortgage payment anymore. Thanks to this, their funds are freed up, so they can do everything they want or need as they get ready for their beautiful golden years.
Similar to other loans, reverse mortgages have interest charges, but neither the interest nor the borrowed amount becomes due until you sell the property, move out permanently, or pass away.
While this might sound like a wonderful method, it comes with a few cons as well. The biggest one is that you leave the younger members of your family (the heirs) with a big loan to deal with. They will have no more than a year to decide whether they want to pay it off, refinance, or sell. If you’re on the fence regarding a reverse mortgage, it might be worth talking to your potential heirs and finding a solution together.
3. Home equity investments
Another method for seniors to make the most out of their home equity is to consider HE investments. This will enable you to exchange a portion of your home’s future value for a lump sum of money. You won’t have to deal with monthly payments, but you’ll need to pay the investor once you sell the property or reach the end of your term. According to experts, this can be anywhere between 10 and 30 years.
Experts suggest that this approach enables homeowners to live in their homes as they normally would and retain complete control over their properties. Various companies provide home equity investments, such as Hometap, Unison, Splitero, Unlock, and Point. It’s worth exploring these options to find the most suitable one for you.
4. Downsize to unlock equity
Selling your home and moving to a smaller, equally cozy, and beautiful one with more affordable property tax can free up a big part of your HE. Downsizing, for instance, can lower your living costs and property taxes while leaving you with extra financial resources to strengthen your retirement fund.
According to experts, you should consider a few things before you sell. First of all, you should calculate all the costs associated with moving and purchasing a new property, and don’t forget about the potential tax implications to make sure this strategy makes financial sense.
…Would you consider downsizing to save more money? Let us know in the comments below!
There’s something you should avoid…
Experts advise against cash-out refinancing to access home equity, despite its apparent benefits. Given that refinancing involves replacing your main mortgage with a new loan that has different terms and a new rate, doing something like this will result in a big increase in interest rates for many homeowners.
According to real estate agencies, roughly 92% of homeowners currently have a mortgage rate under 6%. For older citizens in this group, refinancing would entail obtaining a new loan at the current rates.
When interest rates were extremely low a few years ago, cash-out refinances were fairly common; however, given the current rates, they’re not the best choice. But again, what works for some people might not work for you, which is why we always advise people to seek professional help and only consider our topic a guideline.
Takeaway
Whatever type of home equity product you decide to go for, don’t forget that shopping around could help you get the best rate available. Take your time to check out different companies and options and compare each on rates, terms, fees, and other important details.
In case the rate you’re quoted seems incredibly high, you can take a few steps back to improve your credit score and then reapply once you reach your goal. As experts say, borrowers who have higher credit scores will generally receive the best rates, so keep that in mind. Don’t rush, consider every single detail, decide with your spouse and family members what to do, and don’t feel pressured by any company! You get to decide what’s best for your finances!
Do you know any other tips on how seniors can make the most of their home equity products? Let us know in the comments below because we’re always looking for easy and effective ways to improve our lives and finances. If you need more info regarding this topic, here’s a useful book for you. With that being said, we wish you a happy day filled with smart financial choices! Other than that, here’s another great article for you to check out: Top 11 Things to Never Pay Full Price For