What is the downside of using a home equity loan?

Some people use home equity loans to buy cars and clothes, fund vacations, or purchase second homes. This may lead to major financial problems in the future, if not correctly managed. Often home equity loans are given to people with terms that allow them to pay only the interest on their line of credit each month. This means the borrower never pays off the principal of the loan, and could end up paying a notable amount of money in interest payments. This is often written in the fine print of the loan documents, and is concealed from borrowers to make the loans appear more attractive.

Is it easy to get a home equity loan?

It is easy to get a home equity loan if you have owned your home for many years, and have a good credit history. An equity line may be obtained as soon as the bank can schedule an appraisal of your home to determine its present value. Assuming you have no other loans on the property, you can usually obtain a home equity loan in a matter of days or weeks.

What are other considerations or requirements to obtain a home equity loan?

The borrower should have a good debt-to-income ratio, and is normally required to make minimum monthly payments on the loan.

How do I determine the market price of a house?

The market price of a house is derived from the recent sale price of comparable houses (comparables or "comps") found within a specific radius of the house, the quality of the house, the neighborhood, and the market demand for the house at that price.

What is a "home equity conversion mortgage"?

A home equity conversion mortgage is another name for a reverse mortgage.

What is a "reverse mortgage"?

A reverse mortgage is a financial product for people aged 62 and older with significant home equity. The homeowner may be able to pull out this equity in the form of a mortgage, whereby the bank actually pays the homeowner a lump sum, monthly checks, or a line of credit for the amount of equity the homeowner wishes to receive. There are significant fees in order to do this, usually 10% of the home's value. It al

If you have owned your home for a number of years and have a good credit rating, it can be fairly simple to get a home equity loan.

If you have owned your home for a number of years and have a good credit rating, it can be fairly simple to get a home equity loan.

lows a retiree to pull out equity in his home without having to incur a home equity loan, allowing him to receive additional income. The reverse mortgage is then paid off when the home is finally sold. The reverse mortgage also incurs interest fees, which are paid back when the home is sold.

What are the requirements to obtain a reverse mortgage?

To obtain a reverse mortgage, you must be at least 62 years old, must own your home (meaning you have either no mortgage on your home or a very small balance due), and must live in the home.

How much equity may a homeowner pull out in a reverse mortgage?

The amount a homeowner may pull out in equity in a reverse mortgage depends on the age of the youngest borrower/owner of the home, the current interest rate, the current appraised value of the home, and any mortgage insurance the lender may be required to purchase.

Why are reverse mortgages controversial?

Reverse mortgages are controversial because many lenders target an older, less informed market of potential clients who may not be aware of the many risks of removing equity from their homes. The fees are very large, compared with other forms of loans, and there is a risk that home prices may not increase, therefore making it very difficult for the loans to be repaid. There are no strict income requirements to obtain this type of loan.

When must the homeowner pay back a reverse mortgage?

The homeowner must pay back a reverse mortgage when an owner sells the home, moves out of the home for 12 consecutive months, or fails to pay the property taxes or property insurance on the home.

What is an alternative strategy to using or obtaining a reverse mortgage?

Many retirees choose to downsize their lives and sell their principal residence in order to monetize their home equity, and subsequently pay cash using this equity to purchase a smaller home. This strategy contributes more to sustaining your wealth than pulling equity from the house in the form of a home equity or reverse mortgage.

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