Home equity borrowing questions seniors should know the answers to
Borrowing from your home equity comes with some major rewards, like access to a potentially large, six-figure sum of financing and an interest rate materially lower than many popular borrowing alternatives. But it also comes with significant drawbacks, namely the house in question functioning as collateral and a reduced home value for both homeowners and beneficiaries. Still, with a little luck and an informed approach, homeowners can balance these risks and rewards carefully while improving their overall financial health.
That said, being informed is key here, especially for senior homeowners who may have less financial room to work with than younger homeowners. Home equity borrowing can still be valuable for these older homeowners, but it will need to be viewed through a different lens than it may have been for homeowners who still have a full-time job to rely on. Understanding this, then, seniors and retirees should first consider the answers to a series of important and timely questions. Below, we'll detail four questions to consider the answers to right now.
Start by seeing how much home equity you could withdraw here now.
Home equity borrowing questions seniors should know the answers to
Here are four home equity borrowing questions seniors should contemplate the answers to before formally applying for financing:
Is a HELOC or home equity loan cheaper right now?
Affordability is always key when borrowing money, but especially so when doing it with a home equity line of credit (HELOC) or home equity loan. Failure to make payments as agreed upon could result in the home being foreclosed on by the lender. So borrowers will want to be sure that they can adequately repay all that's been withdrawn, especially seniors who may have little room for error.
One way to ensure affordability is to determine which option is cheaper right now: a HELOC or home equity loan. For qualified borrowers, HELOC rates at 8% are preferable to the average 8.38% home equity loans come with now. But HELOC rates are variable, subject to rise or fall based on market conditions, while home equity loans will remain fixed until refinanced. So that rate structure will also need to be accounted for.
See what HELOC rate you'd be eligible for here.
What is the risk tolerance?
Home equity borrowers shouldn't automatically elect the cheaper rate option before first exploring their risk tolerance. As mentioned above, HELOCs are less expensive than home equity loans now, but home equity loan rates will remain the same even if the rate climate heats up again. HELOCs will not and can, in theory, become cost-prohibitive. So the risk tolerance level, admittedly low for many seniors, will need to be accounted for alongside interest rate concerns. While a lower rate may seem preferable on paper, it needs to be judged carefully against future, unpredictable rate climate changes ahead.
Is a reverse mortgage preferable?
A home equity loan and HELOC aren't the only ways in which seniors can borrow their home equity. A reverse mortgage, largely reserved for homeowners age 62 and older, may also be worth exploring. With a reverse mortgage, a lender pays the homeowner monthly payments out of their accumulated home equity, leaving senior homeowners with fewer concerns about their ability to repay all that was withdrawn. That said, the equity will need to be repaid when the home is sold or when the homeowner dies. And it will reduce the home value for beneficiaries, all concerns that will need to be carefully weighed against the financial needs seniors have right now.
Explore your reverse mortgage options online today.
Can the financial needs wait?
If seniors can delay their financial needs and obviate the need for a home equity loan or HELOC, or simply delay them in a way that won't hurt their financial health, then they likely should consider doing so, especially when the only viable alternative requires the use of their home as collateral.
On the other hand, if the financial needs are urgent (like a major home repair or renovation) or are needed to improve financial health (like debt consolidation), then it may make sense to proceed with borrowing from your home equity. Home repairs and renovations may even qualify for a tax deduction, if used for select purposes, making concerns over rates less of a concern than they otherwise would be. Still, seniors will need to be realistic about their financial needs and, where appropriate, consider alternatives that won't potentially jeopardize their homeownership.
The bottom line
HELOCs, home equity loans and even reverse mortgages can be powerful financial tools that can help seniors improve their financial health. But because they're so powerful and because they utilize the homeowner's accumulated equity, they will need to be carefully and strategically approached to better ensure success. This starts by having thoughtful answers to the above four questions. By thinking of these items in advance seniors can better determine if their home is a safe and smart source of funding now or if they're better served by exploring alternatives or, in some cases, delaying borrowing applications altogether.
