Retirement is a time when most people want to sit back, enjoy their home, and not worry about debt. While some retirees are able to enjoy their golden years without concern for paying their bills, others are not so fortunate.
Taking out the wrong kind of loan or borrowing too much money in retirement, especially borrowing against a house, can leave some seniors without a place to live. It's important to be careful about how and what you borrow, in and just before retirement. Here's what you need to know.
Can you get a Home Equity Line of Credit if you're retired?
Assuming that you have enough equity in your home, good credit, and sufficient income, you should be able to access your home's equity in retirement. A home equity line of credit (HELOC) is one way to tap into the equity that you've built up over many years. If you're living on a fixed income, this will be taken into consideration when you apply for a loan. Shopping around for the right loan and the right lender can help you get the best deal possible.
Are HELOCs a good loan for retirees?
Before you can understand how appropriate a HELOC is for retirees, first understand what a HELOC is and how it works. A HELOC is a type of mortgage in which the amount you can borrow depends on your home equity. Most HELOCs are variable-rate mortgages, which means that the interest can go up. Therefore, estimating the payment amount can be difficult. Not all HELOCs are created equal. Some HELOCs are better for retirees than others. For example, Figure’s HELOC has a fixed* interest rate over the life of the loan. Our HELOC also comes in a lump sum payment. The borrower knows how much they're borrowing, what interest rate to expect, and essentially, the maximum amount they can expect to pay back when the loan comes due. This makes the repayment schedule and amounts more predictable, making budgeting and planning easier.
Are there better loans than HELOCs?
HELOCs aren't for everyone. Retirees have many options if the need for a loan should arise. One type of loan designed for seniors is a reverse mortgage. Reverse mortgages are special loans available only to people age 62 and older.The loan pays out in a lump sum or in regular installments. One important difference between a reverse mortgage and a HELOC is that the reverse mortgage is paid off when the homeowner dies, moves away from their home permanently, or sells the home. The money from the sale of the home can be used to pay for the reverse mortgage once the homeowner is no longer living on the property. This is because, with a reverse mortgage, you’re selling off portions of your home each month. With a HELOC, you are using your accrued equity to receive a lump sum of money, and repaying that line of credit each month. Before you use this option, make sure you understand the risks of a reverse mortgage..
Can you borrow a HELOC responsibly during retirement?
If you're borrowing money against your house, you can reduce the chances of a possible foreclosure in retirement. At Figure, we recommend that the best use of a HELOC is for something that provides a return on your investment. These can include home renovations, paying for education, or opening a business. Home renovations can increase the value of your home, and paying for education or starting a business can increase your prospects for higher income. Another great option we recommend is using a HELOC to consolidate your high-interest debt into a single monthly payment.
We urge caution when borrowing money against your home for expenses like a vacation, renting a vacation home, or everyday bills. Homeowners currently having difficulty paying their normal bills are adding another expense by taking out a HELOC.
Homeowners who are near retirement may need to talk to a financial planner before moving forward with their loan. A good financial planner can help homeowners budget, plan for retirement, and meet their goals all at the same time.
Consult with an expert
If you're thinking about taking out money either in retirement or shortly before retirement, you should be aware of the different types of loans that are available and the details of each. Figure's HELOC may be the right loan for you, but be sure to carefully consider your financial situation to know for sure. No loan is worth losing your home or putting yourself through stress through retirement. When the time comes to borrow money, do it the right way. For more information about Figure.com's HELOC, check out our website.
*The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.