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Home equity loans vs reverse mortgages

[Feb 6, 2011.]


Seniors who want to use the equity stored in their homes to improve their cash flow, should consider the advantages and disadvantages of both a traditional home equity loan and a reverse mortgage. Following is a brief summary of the key features of each type of loan. Consider carefully which of these loans makes the best financial sense.

Advantages of home equity loans

  • Home equity loans are among the cheapest forms of financing available. Because they are secured by real property, they present limited risk to the lender. The more equity present in the home, the cheaper these loans are likely to be. Home equity loan interest rates can be anywhere from 3.25 percent on up.

  • Home equity loans offer lump sum fund distribution up front, with a fixed interest rate and term. Or, you can arrange a line of credit to be accessed at will via a debt card, check book, or online transfer. Once the loan is in place, accessing the money is very convenient.

  • There are no restrictions on how the money can be used. Use it for home improvements, college tuition, debt consolidation, or even a vacation. Home equity loans are usually much cheaper than a credit card, yet the funds can often be accessed in as easy a manner.

  • Any adult home owner is welcome to apply. There are no age restrictions.

More information on home equity loans.

Disadvantages of home equity loans

  • Minimum monthly payments are required.

  • These loans have a fixed term for repayment. The monthly payments may start out interest only for up to ten years, but then the loan will start to amortize, and monthly payments can increase significantly.

  • You must be able to prove enough income to repay the loan. You must also have a minimum credit score.

Advantages of reverse mortgages

  • Reverse mortgages do not require monthly payments. Using a reverse mortgage to consolidation debt, or pay off an existing mortgage, can end monthly payments and significantly improve cash flow. A reverse mortgage can make a senior home owner's golden years the best they can be.

  • You do not need to prove income or have a minimum credit score to qualify for approval. The loan amount approved is based on the home owner's age, the current interest rate, and the amount of equity in the home. You may actually qualify for more money, the older you are.

  • The money can be used for any purpose, and can be accessed in four convenient ways: lump sum, term payments, tenure payments, or a line of credit.

Disadvantages of reverse mortgages

  • Reverse mortgages are only for seniors. You must be at least 62 years old or older.

  • Reverse mortgages can be expensive. Because there are no monthly payments required, interest accrues and compounds over the life of the loan.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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