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Unleash the Trapped Equity in Your Home

Seniors living on a fixed income can sometimes find it difficult to afford the necessities in life, never mind the pleasures.  While other retirees are regularly traveling, dining out, playing golf, or engaging in enjoyable activities that involve cash, people with limited coffers do not have that luxury.


Yet, some individuals may be in a position to gain greater financial flexibility from their homes.  Like everything else, though, caveats exist.  Here are a couple of thoughts to consider.


Home equity loan.  Home equity loans afford folks access to a portion of the equity in their house.  This type of loan is typically prearranged as either a line of credit or an actual loan.  If the agreement is a line of credit, the lender provides access to funds that can be taken out as needed.  If it is an outright loan, a set amount is advanced to the homeowner.  It is often best to speak with different lenders to find the best home equity loan plan available.  Actually, when certain lenders know an individual is shopping around, they may be more competitive.  Still, no matter which institution appears to be the most attractive, it is crucial to fully understand all the charges associated with the loan (e.g., appraisal fee, application fee, underwriting fee, continuing costs, interest rate, penalties).  It is also vital to check credentials to ensure the preferred institution is reputable.  A big plus?  Interest charges on home equity loans are usually tax deductible.


Refinance the mortgage.  People who have mortgages on their homes might benefit from refinancing.  Naturally, if an existing rate is comparable to what is presently being offered, then it does not make sense.  However, if there is a lower rate available, monthly payments could go down.  For example, suppose an individual has a $200,000 mortgage for 15 years at 5% interest, the payment is likely around $1580.  If the person refinances the $200,000 mortgage at 3.5% for 15 years, the monthly payments drop to around $1429 per month.  Impressively, that’s a savings of about $150 per month.  Yet, closing costs and fees generally accompany a refinance, so the bottom line numbers must be considered to ensure this route makes sense.  Adjustable rates, which are also a refinancing option, tend to be lower than fixed rates.  Despite this, they usually carry added risk, as at some point the rate can rise.  With current mortgage interest rates being as attractive as they are, a fixed rate loan may be a safer bet.  Like home equity loans, interest charges on refinances are often tax deductible.

Treading in the finance world can be daunting under optimal circumstances, and it can be especially scary when unscrupulous lending practices make the news.  Consequently, it is best to seek the counsel of a trusted Certified Financial Planner (CFP), or other impartial financial expert, when considering a home equity loan or refinance.  Without a doubt, thorough planning makes sound sense.

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