Why a Reverse Mortgage is Smarter than Credit

May 11, 2012 · Print This Article

For many people who are getting a reverse mortgage, the choice is between a home equity line of credit, taking out more credit card debt, or a reverse mortgage. There are advantages and disadvantages to each particular method of financing. The biggest disadvantage of any credit in retirement is the potential for interest to eat away at your retirement savings, but there are strategies you can use borrow smart.

Credit Cards Not a Great Idea in Retirement
While you will always need a credit card in order to be a consumer in our society, the trap that we fall into is that we put a purchase on a credit card without paying it off immediately. The interest on credit cards is huge when compared against reverse mortgages or home equity lines of credit, and the temptation to use them without a steady income is very high. Steer clear of credit cards as much as you can, and make sure you only have one credit card between you if you are a couple in retirement together. Interest adds up, and you want to make it work for you in investments, not against you with credit card payments. When you make a purchase, make sure you tell your spouse so you can budget together and make a plan to repay it right away.

Home Equity Lines of Credit Good for Small Stuff
A home equity line of credit (HELOC) is a better choice than credit cards for larger purchases like a smaller home renovation project or any other purchase that is under $10,000. However, remember that many HELOC programs allow the bank to bump up your interest rate at any time, not a good plan for someone in retirement. If you need to take out a HELOC, budget a plan to pay it back as quickly as possible and stick to that budget to guard against any interest rate hikes that may present a problem down the road.

Reverse Mortgages Great for Big Stuff
If you foresee needing $10,000 or more, you can borrow up to 50% of your home’s value with a reverse mortgage, and you only need to pay it off when you move. As long as you’ve settled in the spot you want to be in for the duration of your retirement, a reverse mortgage makes sound financial sense. There is nothing to pay back, not even interest payments until you sell your home. This is what makes reverse mortgages so attractive, and the interest rates are far less than you would think. Contact Horizon Equity today to find out how you can turn the equity in your home into cash.