If you are interested in purchasing property or land, chances are you will need some type of loan. Finding the right loan will take time and will differ depending on your financial needs. There are many different factors to consider. Here are a few things to think about.
Assess Your Needs
Affordability means different things to different people. Whether planning to remain in one’s home
indefinitely, or planning to move to different housing at some point in the future, the following list of
questions can help you assess your needs and determine how to support and pursue your housing choices.
Financial Resources and Strategies for the Homeowner
Home Equity Line of Credit
Equity is the value of your home minus the money you still owe on it. A home equity line of credit is a form of revolving credit in which your home serves as collateral. Most homeowners use these credit lines only for major items such as education, home improvements or medical bills, and not for day-to-day expenses. These loans typically have variable rather than fixed interest rates and involve closing costs and fees. Plans set a fixed period, such as 10 years, during which you can borrow money.
Caution: Before entering into a home equity line of credit, consider how you will pay back the money you borrow. Whatever your payment arrangement during the life of the plan, when the plan ends you may have to pay the entire balance owed, all at once. If you are unable to make this “balloon payment” you could lose your home.
A second mortgage also uses your home as collateral and provides you with a fixed amount of money repayable over a fixed period. In most cases the payment schedule calls for equal payments that will pay off the entire loan by the end of that loan period. Second mortgages are often used by homeowners needing a significant amount of money for a specific purpose, such as building a home addition or doing significant home modifications.
Caution: Second mortgages also involve borrowing against your home. Defaulting on the loans could put your home in jeopardy.
Home Equity Conversion Mortgages (Reverse Mortgages)
A home equity conversion mortgage, more commonly referred to as a reverse mortgage, is a type of loan that allows homeowners over 62 years of age to receive cash for their home’s equity without having to sell their home or take on the additional monthly bills of a second mortgage. Loan repayment is not required until the last surviving borrower dies, sells the home or no longer lives in the home as a principal residence. In order to qualify for this type of loan, borrowers must live in the home and have paid off, or nearly paid off, their home mortgage.
Reverse mortgages provide homeowners who lack cash flow but have significant equity in their homes with the option of borrowing against that equity so that they can have the funds they need to meet everyday expenses and pay for such additional support services as personal assistance or home care services. These mortgages tend to be more costly than traditional loans because they are rising-debt loans. Each month interest is applied to the principal loan balance. Because the consumer is not paying down the loan, the total amount of interest owed increases significantly over time as the interest compounds.
Caution: Because of this rising-debt and shrinking equity scenario, a reverse mortgage could use up all or a significant portion of the equity in a home. Therefore it is important to learn as much as you can about a reverse mortgage before signing on the dotted line. Counseling is required to apply for an FHA-insured reverse mortgage and is a good idea for those considering other products as well. HUD (U.S. Department of Housing & Urban Development) approved counseling is the most likely place to get help on a local level. To find such counseling in your state, call 800-569-4287, or go to the following Web site. www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm
Counselors from the national agencies listed below are also permitted to provide face-to-face and telephone counseling regarding Home Equity Conversion Mortgages (reverse mortgages).
Nat’l Foundation for Credit Counseling
Money Management International
American Association of Retired Persons
National Council of Aging