Best Home Equity Loan Fixed Rates – If you own a home and are at least 62 years old, you may be able to turn your home equity into cash to pay for living expenses, health care expenses, home renovations, or anything else you need. This option is a reverse mortgage. However, homeowners have other options, including home equity loans and home equity lines of credit (HELOCs).
All three allow you to take advantage of your home equity without having to sell or move out of your home. However, these are different loan products and it will help you understand your options to decide which one is best for you.
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A reverse mortgage works differently than a forward mortgage—instead of making payments to the lender, the lender makes payments to you based on a percentage of your home’s value. Over time, your debt grows—as you make payments and accrue interest—and your equity shrinks as the lender buys more and more of it.
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You continue to own your home, but once you leave the home for more than a year (even if it’s an involuntary hospital or nursing home stay), sell it, or it dies—or you become delinquent on your property taxes or insurance. Or the house is destroyed – the loan becomes overdue. The lender sells the home to recoup the down payment (plus fees). The money left in the house goes to you or your heirs.
Carefully research the types of reverse mortgages and make sure you choose the one that best suits your needs. Check the fine print – with the help of an attorney or tax advisor – before signing. Reverse mortgage scams that try to steal your home often target the elderly. The FBI advises you not to respond to unsolicited ads, be suspicious of people who claim they can give you a free home, and don’t accept payments from private individuals for a home you didn’t buy.
Note that if both spouses have their names on the mortgage, the bank can’t sell the home until the surviving spouse dies—or the aforementioned tax, repair, insurance, moving, or home sale situations occur. Couples should carefully research the surviving spouse’s case before agreeing to a reverse mortgage.
There may be other drawbacks, including higher closing costs and the possibility that your children may not inherit the family home if they default on the loan. Interest accrued on a reverse mortgage is usually accrued before the mortgage is terminated.
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Mortgage discrimination is illegal. If you believe you have been discriminated against based on your race, religion, gender, marital status, use of public assistance, national origin, disability or age, you can take action. 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 the equity in your home into cash. It works just like a primary mortgage – in fact, a home equity loan is also called a second mortgage. You take out a one-time loan and make regular principal and interest payments, which are usually a fixed rate. Unlike a reverse mortgage, you don’t have to be 62 to get one, and you have to start paying off the loan as soon as you get it.
With a home equity line of credit (HELOC), you have the ability to borrow from an approved line of credit as needed. In this respect, a HELOC works like a credit card.
With a standard home equity loan, you pay interest on the entire loan amount, but with a HELOC, you only pay interest on the money you actually withdraw.
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A fixed interest rate on a home equity loan means you always know what your payments will be, while a variable rate on a HELOC means the repayment amount changes.
Currently, the interest you pay on home equity loans and HELOCs is not tax-deductible unless you use the money for home repairs or similar activities on the residence securing the loans. Prior to the Tax Cuts and Jobs Act of 2017, home equity debt interest was fully or partially tax deductible. Note that this change applies to tax years 2018 through 2025.
Plus—and this is an important reason to make this choice—with a home equity loan and HELOC, your home remains an asset for you and your heirs. However, it is important to note that your home acts as security, so you risk losing your home if you default on the loan.
Reverse mortgages, home equity loans, and HELOCs allow you to turn your home equity into cash. However, they differ in terms of payments and coverage, as well as requirements such as age, equity, credit and income. Based on these factors, here are the main differences between the three types of loans.
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Reverse mortgages, home equity loans, and HELOCs allow you to turn your home equity into cash. So how do you decide which type of loan is right for you?
In general, a reverse mortgage is a better option if you’re looking for a long-term source of income and don’t mind not having your home as part of your estate. However, if you are married, make sure that the surviving spouse’s rights are clear.
Either a home equity loan or a HELOC is a better option if you need short-term cash, can afford the monthly payments, and prefer to keep your home for your heirs. Both have significant risks along with their benefits, so consider your options thoroughly before taking any action.
HELOCs and home equity loans often have low or no fees and lower or no closing costs when compared to reverse mortgages. Reverse mortgages have mandatory counseling sessions and typically have much higher closing costs than traditional mortgages.
Which Of These 3 Options Is The Best Way To Tap Into Your Home Equity?
Reverse mortgages will take longer to process with mandatory counseling sessions, closing disclosures, etc. A HELOC generally processes a little faster than a home equity loan, with many lenders advertising closing times of less than 10 days. In comparison, most home equity loan lenders report a processing time of two to six weeks.
Home equity loans and HELOCs have credit and income requirements for approval. A reverse mortgage does not require proof of good credit, but you will need to prove your ability to maintain the property and pay taxes and insurance payments. If you can’t prove enough to get approved 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 all have their place. If you need cash temporarily, have the income and credit to prove it, and are trying 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.
It requires writers to use primary sources to support their work. These include white papers, government announcements, original reports and interviews with industry experts. We also refer to original research from other reputable publishers where appropriate. You can learn more about the standards we follow when producing accurate and unbiased content in our editorial policy. This means that the lender can eventually foreclose on your home if you default on your payments. While the two loan types share these important similarities, there are also key differences between them.
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When people use the term “mortgage,” they are generally talking about a conventional mortgage in which a financial institution, such as a bank or credit union, lends the borrower money to purchase a home. In most cases, the bank will lend up to 80% of the home’s appraised value or purchase price, whichever is less. For example, if the home is appraised at $200,000, the borrower will qualify for a mortgage of up to $160,000. The borrower will have to pay the remaining 20% or $40,000 as a down payment.
Non-traditional mortgage options include Federal Housing Administration (FHA) loans that allow borrowers up to 3.5% down as long as they pay mortgage insurance, and the US Department of Veterans Affairs (VA) and US Department of Agriculture (USDA) Loans require 0% down payment.
The mortgage interest rate can be fixed (the same for the term of the mortgage) or variable (for example, it changes every year). The most common terms are 15 or 30 years. A mortgage calculator can show you the impact of different rates on your monthly payment.
If the borrower defaults, the lender can foreclose on the home or security
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