7 Ways to Borrow When Retired
Many retirees believe that they can’t obtain a loan (car, house, or emergency) because they no longer receive a salary. Although it may be challenging to borrow when retired, it’s far from impossible. According to most experts, you should avoid borrowing from retirement plans such as 401(k), individual retirement accounts (IRA), or annuities— as this will affect the savings and income you count on in retired life.
Here are seven borrowing options and their benefits and drawbacks— that senior citizens can use instead of taking funds from their savings.
1. Home Mortgage
The most common type of secured loan is a home loan which uses the property you purchased as collateral. The biggest concern with retirement home loans is income, especially if it comes from savings or investments.
2. HELOCs or Home Equity Loan
This type of secured loan is based on extensions borrowed against real estate equity. A customer must have 15% to 20% equity in their residence– a loan-to-value (LTV) ratio of 80% to 85%–and generally a credit report of at least 620.1.
Notably, the Employment Act and Tax Cuts no longer deduct interest rates on housing loans unless the money is employed to renovate houses. The other alternative similar to a home equity loan: is the home equity line of credit (HELOC).
The owner’s home guarantees both these loans. A secured home equity loan is a type of loan that provides a one-time repayment plan to the borrower at a fixed interest rate. On the other hand, a HELOC (Home Equity Line of credit) is a credit line that can be used when required. HELOC usually has variable interest rates, and payments are generally not fixed.
3. Cash-out refinancing loan
This alternative to a home loan involves refinancing an existing house in an amount higher than the borrower’s debt but lower than the house appraisal value—the extra amount becomes a secured cash allowance.
In addition to refinancing in a shorter period (for example, 15 years), the borrower will extend the time until the mortgage is repaid. To decide between a home equity loan and refinancing, consider interest rates on the old and new funding along with closing costs.
4. Reverse Mortgage Loan
A reverse mortgage is also known as a home equity conversion mortgage or HECM. This type of mortgage is also an important option to borrow money when retired. It provides monthly income or a lump sum, depending on the home’s estimated value. Unlike home equity loans, the loan will not be paid until the owner dies or moves out of the house.
Generally, heirs or homeowners can sell the property to repay the loan upfront. More so, the owner or heir can refinance the loan to retain the property, or financing institutions may be authorized to sell the house to refund the loan balance.
5. Borrow with Car Loan when Retired
Car loans offer competitive interest rates and are easier to secure because they are guaranteed by purchasing a vehicle. Paying cash can save you interest and only makes sense if it doesn’t deplete your savings. Also, you can sell your car or vehicle in the event of emergencies to recover your funds.
6. Debt Consolidation Loan
Debt consolidation loans are specifically designed to consolidate debts and liabilities. This type of unsecured loan allows you to refinance existing debt, especially when expenditures are low. Furthermore, the interest rates may be lower than the interest rates of your current debt.
7. Unsecured Loans and Lines of Credit
Though unsecured loans and lines of credit are more difficult to obtain, they do not put assets at risk. Options include credit unions, banks, peer-to-peer (P2P) loans (funded by investors), and even credit cards with a 0% initial annual percentage. Only consider using a credit card as a payment source to ensure repayments before the interest rate expires.