As the baby boom generation gets older, many Americans have built up equity in one of their most important assets, their home.
As these consumers start looking toward the future, many may want to extract value from their home, without selling their home outright. The good news is that there are different options available to consumers who have built up equity in their home and want to take advantage of it today.
1. Home Equity Loans
Often referred to as a second mortgage, this type of loan is typically structured like a primary mortgage. It can have fixed or variable interest rates, though in most cases the rate is fixed. Also, the interest rate is typically higher than for the first mortgage. Often these loans have a shorter repayment period of 5 to 15 years instead of the typical 15 to 30-year repayment period of a first mortgage.
The benefit of a Home Equity Loan is that it allows consumers to pull out all their equity at once. This allows them to pay for large lump sum expenses such as education, medical expenses or in some cases, debt consolidation.
2. Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) is structured to work as a cross between a standard mortgage loan and a credit card. HELOCs are secured by your home, which lowers the risk for your bank. This allows them to offer a low interest rate, similar to a mortgage.
However, instead of being a one-time loan like a mortgage, a HELOC is an open ended loan, offering a revolving line of credit. This lets you draw from your line of credit and either leave a balance outstanding or pay it off immediately.
A HELOC is best suited for consumers who need to draw cash over time. Usually there are set periods when you can draw funds freely, and during this period the minimum payment can be interest only or interest and principal. Like a credit card, it’s important that you’re able to repay your debt. It’s important to keep in mind that HELOCs can also be adjustable rate loans.
3. Reverse Mortgages
As previously discussed, a reverse mortgage or Home Equity Conversion Mortgage (HECM) allows homeowners age 62 or older to convert their home’s equity into available cash.
With a reverse mortgage, the homeowner receives a loan based upon the existing equity in their home. The amount of money they are able to receive is often based on the age of the youngest borrower and the value of the home.
They retain ownership in their home. However, they are still responsible for property taxes, homeowner’s insurance, and keeping the property in good condition.
There are many benefits and uses for a reverse mortgage which we have outlined in past articles.
Talk to an Expert
Before making any decisions regarding reverse mortgages or your home equity, talk to us.
DebtHelper.com’s HUD approved counselors can serve as an impartial guide to help you make the best decision for you and your home. Ready to get started? Schedule a free counseling session today or call us at 800-920-2262.
