The rate of home price appreciation observed over the past year may cause some American seniors to consider ways in which they can tap their elevated levels of home equity, especially considering the route taken by the existing mortgage rate environment. However, while plenty of options exist for the tapping of home equity, making the right decision on a loan instrument that would allow you to gain additional cash from your home is more essential than ever.
This is according to Linda Stern, former Wall Street editor for Reuters and a personal finance columnist in a piece published this week at AARP.
“Some solid reasons to borrow against your house include paying for home improvements, long-term care or long-term care insurance premiums, and raising cash so you can stay in a home you aren’t ready to leave,” she writes. “Some financial pros also suggest using home equity to pay for college tuition or a second home, though there are other ways to pay for those without putting your house on the line.”
Using home equity for unsecured debt such as a credit card balance, medical bills or everyday expenses is less recommended, however, and may impair future plans that a senior may have.
“While you can tap your home for everyday expenses if you’re house-rich and cash-poor, that takes away equity that you may need for care later in life or may want to leave to your kids,” she writes.
One such method for tapping home equity is through the use of a reverse mortgage loan, although being honest about whether or not such an option is affordable is an important part of the equation, she writes.
“If you watch TV, you’ve probably seen pitches for reverse mortgages – loans against your home that don’t have to be repaid until after you no longer occupy it,” she says. “All that marketing is a tip-off that these are a more expensive way to borrow. To get a reverse mortgage of about $165,000, you’ll pay in the neighborhood of $15,000 in closing costs, according to the National Reverse Mortgage Lenders Association’s online calculator. (The closing costs of a refinancing, to make a comparison, average less than $4,000 in most states, according to ClosingCorp, which collects those figures.)”
However, reverse mortgage proceeds can come in a variety of disbursement options including a lump sum, tenure payments or a line of credit that can be drawn when needed.
“[Pittsburgh financial planner Diane Pearson] suggests that the best use of a reverse mortgage may be if a married couple own a home and one of them needs assisted living or nursing home care and the other wants to stay in the house,” she writes. “That couple could use the proceeds to pay for care, either away from or in the home. But the balance due on a reverse mortgage grows, and if you hold one for a long time, it could eat away at your equity, leaving you (and your heirs) with a diminished estate.”
Read the column at AARP.