Debt in retirement can be a crippling thing for seniors in America to overcome, and for many who feel like they are without many options to try and address that, home equity could naturally come into play as a potential solution. But not all instruments that allow the tapping of home equity are created equal, and instruments including a home equity loan or a home equity line of credit (HELOC) should probably be avoided if the goal is to pay down existing debt.
This is according to the perspective of a financial counselor shared in an article published this week at the New York Times. While a HELOC or home equity loan could be potentially detrimental for a senior looking to pay down debt – particularly credit card debt – a reverse mortgage can potentially be a bit of a different story, according to this planner.
Filling income gaps in retirement can be a tricky proposition, since many seniors look to funding sources like credit cards to make certain ends meet. This can potentially lead to disastrous financial consequences, though, says Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling.
“Older people use high-interest credit cards to fill income gaps, but those bills can be particularly stressful for those on fixed incomes who can afford to make only minimum payments,” the Times says with attribution to McClary.
“It can be depressing when they see their later years of life consumed with making payments and not making much of a difference,” he added, instead recommending for retirees to ask their credit card company for a lower interest rate.
Placing expenses on credit cards is a costly way to satisfy certain debt, and medical bills typically charge small amounts of interest that can transform into high-interest costs if placed on credit cards, according to Melinda Opperman, president of Credit.org.
Repayment plans are often something that can be directly worked out with the medical institution. Or, home equity can come into play. Tapping equity generally comes with lower interest than a credit card, but could put a home at risk according to Rose Perkins, quality assurance manager for CCCSMD, a credit counseling service in Columbia, Md.
“The consumer has increased the amount they owe on their home, so if they cannot meet the new payment for any reason, they are at risk of foreclosure,” Perkins told the Times.
In lieu of other cost-cutting options or after others have been exhausted, some credit counselors could recommend either downsizing into a smaller home, or taking out a Home Equity Conversion Mortgage (HECM) as sponsored by the federal government.
“A credit counselor or a certified financial planner could help a homeowner decide if a reverse mortgage, which is a complex product, would fit into an overall debt-reduction plan,” the Times says, attributing the idea to its quoted experts.
Read the column at the New York Times.