Borrowing against the house is something that many older Americans do not want to do, but it is likely that there will be some sort of chore that will require additional money at this point in life. Whether a home needs renovations to make it easier to age in place or medical bills start to get harder to pay, there are many reasons why some seniors may need money that could result in borrowing. .
Instead of a more conventional method of borrowing, however, there may be a few good reasons why borrowing against the equity accumulated in the home is a smart choice. This is what financial columnist Maurie Backman says in a new article in The Motley Fool.
One reason is that the process of qualifying on certain types of home equity loan may actually be easier compared to more conventional forms of borrowing.
“Personal loans are unsecured, which means they are not tied to a specific asset,” Backman writes. “But when you borrow against your home, your home itself is used as collateral for your loan. This means that your credit score is lower in terms of qualifying because your lender has recourse if you fall behind on your payments. This doesn’t mean that you won’t have a problem borrowing against your home if your credit is extremely low.
Home equity borrowing can also be relatively affordable when looking at other forms of borrowing, she writes.
“The interest rate you’ll pay on a home equity loan or HELOC is usually lower than what you’ll pay on a personal loan, and it can be considerably lower than what you’ll pay on a credit card,” says it. “Also, if you do a refinance with withdrawal, you could get a really good deal given the current position of the refinance rates. “
While not specifically mentioning reverse mortgages in this instance, mortgage rates on Home Equity Conversion Mortgages (HECMs) and some proprietary reverse mortgage products were also supportive and resulted in a notable increase in trading. refinancing.
Another reason why borrowing against the home could be beneficial is the impact it could have on a credit score.
“When you charge expenses on a credit card and have a balance that you pay off over time, you risk lowering your credit score in the process,” she says. “One factor that goes into calculating this score is your credit utilization rate, which measures the amount of available credit you are using at a time. Even if you make your minimum payments each month, having too high a credit card balance could still damage your credit score. On the flip side, if you borrow against your home and make your loan payments on time and in full every month, it won’t hurt your credit at all.
Without specifically mentioning a reverse mortgage in this case, taking out a reverse mortgage largely has no effect on a borrower’s credit rating, unless a borrower decides to use the product. to pay off other forms of debt that may be affected by a credit rating.
Read the Motley Fool column.