Borrowing against the home is something that many older Americans are unwilling to do, but chances are that there will be some kind of task that will require some additional cash at this point in life. Whether a home needs renovations to more easily allow for aging in place, or medical bills have started to become more difficult to keep up with, there are an abundance of reasons that certain seniors may require money that could result in borrowing.
Instead of a more conventional borrowing method, though, there may be a few good reasons that borrowing against the equity built up in the home is a smart choice. This is according to financial columnist Maurie Backman in a new article at The Motley Fool.
One reason is that the qualification process on certain kinds of home equity borrowing can actually be easier when compared with more conventional forms of borrowing.
“Personal loans are unsecured, which means they’re 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. That means that your credit score is less important in terms of qualifying because your lender has recourse if you fall behind on your payments. This doesn’t mean you won’t have a problem borrowing against your home if your credit is extremely low.”
Home equity borrowing may also prove to be comparatively affordable when looking at other forms of borrowing, she writes.
“The interest rate you’ll pay on a home equity loan or HELOC is generally lower than what you’ll pay on a personal loan, and it can be substantially lower than what you’ll pay on a credit card,” she says. “What’s more, if you do a cash-out refinance, you might snag a really good deal given where today’s refinance rates stand.”
While not specifically mentioning reverse mortgages in this instance, mortgage rates on Home Equity Conversion Mortgages (HECMs) and certain proprietary reverse mortgage products have also been favorable and have led to a notable increase in refinance transactions.
Another reason that borrowing against the home could be beneficial is because of the impacts it could have on a credit score.
“When you charge expenses on a credit card and carry 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 that score is your credit utilization ratio, which measures the amount of available credit you’re using at once. Even if you make your minimum payments each month, too high a credit card balance could still cause damage to your credit score. On the other hand, 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.”
While also not mentioning a reverse mortgage specifically in this instance, taking out a reverse mortgage largely has no effect on a borrower’s credit score unless a borrower chooses to use the proceeds to pay down other forms of debt that can be affected by a credit score.
Read the column at the Motley Fool.