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Pay Off Mortgage With Home Equity Loan – If you own a home and are at least 62 years old, you can convert your home equity into cash to pay for living expenses, medical expenses, home maintenance, or anything else you need. This option is a reverse mortgage; However, other options are available to homeowners, such as home equity loans and home equity lines of credit (HELOCs).
All three allow you to use the equity in your home without having to sell or move out of your home. However, these are different loan products and you need to understand your options to decide which one is best for you.
Pay Off Mortgage With Home Equity Loan
A reverse mortgage works differently than a forward mortgage: Instead of paying the lender, the lender pays you a percentage of your home’s value. As time goes by, your debt increases, as payments are made, interest accrues, and as the lender makes more purchases, your equity decreases.
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You still own the home, but once you’ve been out of the home for more than a year (even if you’re in the hospital or in a nursing home involuntarily), you sell it, or you die, or your property taxes and insurance are covered, or the home goes into disrepair – the loan expires. . The lender sells the home to get back the money they paid you (plus fees). Any assets left in the home will go to you or your heirs.
Research the types of reverse mortgages and choose the one that best suits your needs. Check the fine print with a lawyer or tax advisor before you sign. Reverse mortgage scams that aim to steal your home equity often target adults. The FBI advises not to respond to unsolicited ads, to be wary of people who claim to give you a free home, and to not charge individuals for a home they didn’t buy.
Please note that if both spouses are involved in the mortgage, the bank cannot sell the home until the surviving spouse dies or the aforementioned tax, repair, insurance, moving, or home sale situations occur. Before a couple agrees to a reverse mortgage, the surviving spouse needs to be thoroughly researched.
There can also be other downsides, such as higher closing costs and your children not inheriting the family if they default on the loan. Interest on a reverse mortgage typically accrues until the mortgage is paid off.
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Mortgage discrimination is illegal. You can take action if you believe you have been discriminated against because of your race, religion, gender, marital status, use of public assistance, national origin, disability, or age. One such step is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
Like a reverse mortgage, a home equity loan allows you to turn your home equity into cash. It works just like your primary mortgage; In fact, home equity loans are also known as second home loans. You take out the loan as a lump sum and make regular payments to pay off the principal and interest, which is usually a fixed rate. Unlike a reverse mortgage, you don’t have to be 62 years old, and you have to start paying off the loan soon after taking out the loan.
With a home equity line of credit (HELOC), you can borrow up to your approved credit limit if needed. In this sense, a HELOC works like a credit card.
With a conventional home loan, you pay the full amount of interest on the loan, while with a HELOC, you only pay interest on the money you borrow.
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A fixed-rate home loan means you always know what your payments will be, while a variable-rate HELOC means your payments change.
Currently, the interest you pay on your home loan and HELOC is not tax-deductible unless you use it for home improvements or similar activities to secure your loan. Before the Tax Cuts and Jobs Act of 2017, mortgage interest was fully or partially tax deductible. Please note that this change is for the years 2018-2025.
Also, this is an important reason to choose this option with home equity loans and HELOCs. However, you should be aware that since your home is secured, you risk losing the collateral if you default on the loan.
Reverse mortgages, home equity loans, and HELOCs allow you to turn your home equity into cash. But they differ in payment and repayment terms, as well as age, equity, credit and income requirements. Below are the main differences between the three types of loans based on these factors.
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Reverse mortgages, home equity loans, and HELOCs allow you to turn your home equity into cash. So how do you determine which type of loan is right for you?
In general, if you are looking for a long-term source of income and do not consider your home to be part of your estate, a reverse mortgage is a better option. However, if you are married, make sure the surviving spouse’s rights are clear.
If you need money short-term, can make monthly repayments, and prefer to leave your home to your heirs, a home equity loan or HELOC is considered a better option. Both have significant benefits as well as significant risks, so consider the options carefully before taking any action.
HELOCs and home equity loans have little or no fees and little or no closing costs compared to reverse mortgages. Reverse mortgages have mandatory counseling sessions and closing costs are much higher than traditional mortgages.
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Reverse mortgages can take a long time to process with mandatory counseling sessions, closing disclosures, etc. HELOCs typically process a little faster than home equity loans, with several lenders advertising closing times of less than 10 days. By comparison, most mortgage lenders advertise a processing time of between two and six weeks.
Home equity loans and HELOCs have credit and income requirements to be approved. Good credit is not required to be approved for a reverse mortgage, but you will need to demonstrate your ability to maintain the property and pay taxes and insurance. If you can’t prove it enough to qualify for a standard reverse mortgage, you can get a single-purpose reverse mortgage through a local nonprofit or government agency.
Reverse mortgages, HELOCs, and home equity loans each have their niche. If you need temporary cash, secure your income and credit, and want to leave your home to your heirs, a home equity loan or HELOC may be a better option for you. If you’re already retired and need to supplement your income, aren’t ready to downsize, and don’t want to leave your home to your heirs, a reverse mortgage may be the best option for you.
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Home Equity Loan Or Heloc Vs. Cash Out Refinance
We are now approaching the third week of the cycle break, with many staying at home or working from home, kids busy with homeschooling, and some going on unpaid leave until further notice. Hope everyone is doing well at home so far!
As the number of confirmed cases continues to rise, our healthcare heroes are working tirelessly around the clock to treat infected patients. I would like to express my gratitude to all of you.
We cannot forget all the other members of the frontline, as well as those who work in the essential services sector. Because together with you, we have an orderly and safe society that keeps our economy stable, so we can go out and carry our essentials safely. Thanks for everything.
Over the past few weeks, some of my blog readers have asked me mortgage questions after reading my blog post: 4 Options for Homeowners to Cope with the 2020 Recession.
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As announced on 21 April 2020, lockdown measures will be further tightened to further reduce the spread of COVID-19 and the closure period will be extended for another four weeks until 1 June 2020.
There is always a light at the end of the tunnel that will lead you out of the darkness. – Darren Ong
I understand that many people are struggling with cash flow in these difficult times
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