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One of the biggest questions seniors ask is whether or not they should spend time focusing on a home equity line of credit, or if they should look into a reverse mortgage. Both offer their own long lists of pros and cons, but there are many differences between the two. One is for those who can’t afford to make the payments on a home equity line of credit or just don’t have the credit to apply for a loan. The other is for those who can afford to make payments and might want to leave their kids their home when they are gone. There are some differences in each, and not everyone will agree that one or the other is right for them. What they can agree upon, however, is that one or the other works for them. Get to know the difference, and then make the decision to apply for one or the other. Education is knowledge, and knowledge is a powerful financial tool.

Reverse Mortgage

This mortgage is one given to seniors who own their home. This type of mortgage allows homeowners to take a loan for the value of their home and use it as they please. There are no monthly payments. There are no debts owed as long as the homeowner is alive. This is a wonderful solution for homeowners who can’t afford a traditional loan or line of credit using their home as collateral. It’s not for everyone, but it’s one that doesn’t affect anyone’s credit. There are not credit checks associated with a loan of this nature, and that makes it easy for seniors with a challenged credit history or fixed income to apply for a loan.

There is no repayment period on a reverse mortgage unless you die. When you are no longer alive, the repayment program kicks into effect. Someone in your family can repay the entire amount of the loan in full to continue possession of the home, or they can sell it and repay the loan. It’s up to your family.

Line of Credit

A line of credit is similar to a loan. It’s taken through a bank. You apply for a line of credit, which is the value of your home. If you have no equity in your home, you cannot apply for a line of credit such as this one. For example, if your home is worth $300,000 and you only owe $200,000 on the mortgage you might be able to take out a line of credit on the equity you have in the home, which is around $100,000. This line of credit is used at your discretion. It works a little like a credit card in that you pay monthly payments on it to repay it to the bank, but you can draw on those funds anytime you’d like for a specific number of years.

You must have good credit, you must have the income to justify this type of loan, and you must be willing to repay the loan each month with at least a minimum payment. It’s not a loan just anyone can get, which is a bit of a downfall for many consumers. This loan works well if you have the credit, but it’s not the one that works for everyone.

Refinance

Refinancing is another plan that might work for you, but it does require good credit and the ability to repay a loan. This allows you to refinance your current mortgage at a lower rate and even for more than you owe on your home. You can take out a much larger mortgage for another 30 years, and you can save on your monthly payments. It’s a great option for those who can afford to do this.

Deciding Between the Three

Choosing a loan is not always the simplest decision a homeowner will make. If you have good credit but it’s not excellent, you might worry you can’t get a good enough rate to make the payments as low as you might prefer. You might not want to make any payments at all. Your job is to consider how each loan affects your ability to survive, and how it will affect those who are left after you are gone. Once those considerations are made, it becomes easier for you to make a final decision on which loan is better for you.

The financial decision that’s right for you lies in your financials and your personal preference. Don’t let the decision come lightly. Take your time and choose well, because the outcome of this decision is the one that will work the best for you.