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Home Equity Loans and Lines

Home equity loans and lines may be good choices for homeowners that are looking for smaller amounts of cash and have adequate monthly income and resources to repay them. They are not usually a good choice for older homeowners that are looking to increase their monthly cash or income. This is because they require the homeowners to make monthly payments to the lender (although they are sometimes used this way for short periods of time).

The amount of cash available and the interest rates charged are based on the income and credit of the homeowners. Homeowners with credit challenges and lower income will qualify for smaller home equity loans and lines, with higher interest rates.

Home Equity Loans

Home equity loans generally provide a lump sum of cash. They may have a fixed interest rate (but interest is charged on the full amount of the loan immediately) and a fixed monthly payment that is made to the lender.

Home Equity Lines

Home equity lines provide a way for homeowners to have access to cash when they need it (similar to a credit card). They usually have an adjustable interest rate, but interest is only charged on the amount used. As the homeowner uses their line of credit the outstanding loan balance increases. They require monthly payments be made to the lender that increase as the outstanding loan balance increases.

Versus Reverse Mortgages

There are some important differences between home equity loans and lines and reverse mortgages. The main difference is that home equity loans and lines require that the homeowners make monthly payments to the lender. As the outstanding loan balance increases, the amount of those monthly payments increases, which reduces the homeowners’ monthly cash. Home equity loans and lines require the homeowners to qualify from an income and credit perspective, and they have a predetermined date when they must be repaid. If the homeowners are unable to make monthly payments or repay the loan on its due date, they may be at risk of losing their home.

Selling the Home

Some homeowners elect to sell their home rather than obtain a reverse mortgage. This option requires that a new residence be found. When homeowners consider this option, they need to remember that total sales costs (realtor commissions plus other costs) generally run around 8% of the sales price of the home, and that there may be capital gain taxes due. Also, if the homeowners currently benefit from favorable property taxes (for example Proposition 13 in California), they may be paying higher property taxes for the replacement home. Many older homeowners prefer to remain in their current home, but selling and downsizing appeals to some.

Some older homeowners sell their current home, buy a smaller home, and obtain a reverse mortgage on the new one. This might provide cash reserves from the sale, and a line of credit or monthly income from the reverse mortgage.

Home Improvement Grants and Loans

Home improvement grants are sometimes available to homeowners that qualify. They usually must be used to complete specific home repairs, and may not be used to cover monthly living expenses. Homeowners that do not need additional income but are looking for small amounts of cash to make home repairs might consider this option, but this option is usually only available to very low income homeowners.

Deferred Property Taxes

Some state and local government agencies allow some older homeowners to defer the payment of their property taxes. This is done by placing a lien on the property for the amount of the unpaid taxes, and this lien doesn’t need to be repaid as long as the homeowners remain living there (similar to a reverse mortgage).

Public Benefits

Some older adults are eligible for special financial government assistance. Examples of this include income programs (SSI), assistance with health care costs (Medicaid, etc), and discounts on prescription drug costs.

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