Seniors on a fixed income will often find themselves in need of a loan in order to cover unexpected costs, such as making major repairs to their home. In many cases, borrowing against the equity in their home will prove to be the most realistic option for these seniors. There are two different loan products that will allow them to make repairs: a traditional home equity loan and a reverse mortgage. If you are like many seniors, choosing between these two options may be quite difficult. However, by taking the time to carefully consider the pros and cons of each option, you will be able to determine which loan product is best suited to your particular needs.
Home Equity Loans
Home equity loans provide you with a lump sum payment that is based off the amount of equity you have in your home. Since these loans provide you with a large sum of cash at once, they are often the best option for individuals who require an immediate increase in cash flow in order to cover a substantial expense.
Traditional home equity loans will need to be repaid over time by making fixed monthly payments. These payments will cover both the principle of the loan and any interest that is charged on the loan. While this type of repayment schedule will typically cost the borrower less over time than when choosing other loan options, the need to make a payment each month can prove quite difficult for many seniors who are forced to live on a small monthly budget.
If you find that you are unable to repay a traditional home equity loan, you may be forced into selling your home in order to avoid the possibility of foreclosure.
Reverse mortgages are typically paid out over the course of many years in the form of a structured settlement. Consequently, these loans are ideal for seniors who require an ongoing increase in their monthly cash flow. For instance, individuals who find that they have outlived their retirement savings may benefit from the use of a reverse mortgage since it provides them with a fixed amount of cash each month in order to cover their financial responsibilities.
Reverse mortgages do not need to be repaid as long as you live in your home. Instead, interest will continue to accumulate for as long as the loan is active. Once you vacate the home, the entire balance of the loan, including all interest, will become due.
While this repayment schedule may seem ideal for many seniors who do not plan to vacate their home until their death, it is important to remember that things do not always go according to plan. If you are forced to move into an assisted living facility or nursing home later in your life, you may find that you need the proceeds of selling your home in order to help cover your living costs. If these proceeds are already earmarked for the repayment of a reverse mortgage, you may find yourself without the cash you need to cover long-term care costs. For more information, talk to a professional like Union State Bank.