10 ways to borrow in retirement
Many retirees think they can’t take out a loan – for a car, house, or emergency – because they are no longer receiving a salary. In fact, while it may be more difficult to qualify to borrow in retirement, it is far from impossible. One thing to generally avoid, according to most experts, is borrow from pension plans– like 401 (k), Individual Retirement Accounts (IRA), or pensions – as this can hurt both your savings and the income you rely on in retirement.
Key points to remember
- It is usually better to get a loan than to borrow against your retirement savings.
- Secured loans, which require collateral, are available to retirees and include mortgages, home equity loans and withdrawal loans, reverse mortgages, and auto loans.
- Borrowers can usually consolidate federal student loan debt; it is also possible to consolidate credit card debt.
- Almost anyone, including retirees, is eligible for a secured or unsecured short-term loan, but these are risky and should only be considered in an emergency.
Eligibility for retirement loans
For self-funded retirees, deriving the bulk of their income from investments, rental property, or retirement savings, lenders typically determine a potential borrower’s monthly income using one of two methods:
- The asset draw counts regularly every month withdrawals from retirement accounts as income.
- Depletion of assets, whereby the lender subtracts any down payment from the total value of your financial assets, takes 70% of the remainder and divides it by 360 months.
To either method, the lender adds any pension income, Social Security benefits, annuity income, and part-time employment income.
Keep in mind that loans are either secure or unsecured. A secured loan requires the borrower to provide collateral, such as a house, investments, vehicles, or other property, to secure the loan. If the borrower does not pay, the lender can seize the collateral. An unsecured loan, which does not require collateral, is more difficult to obtain and has a higher interest rate than a secured loan.
Here are 10 borrowing options, along with their pros and cons, that retirees can use instead of withdrawing funds from their nest egg.
1. Mortgage loan
The most common type of secured loan is a mortgage loan, which uses the house you buy as collateral. The biggest problem with a mortgage for retirees is income, especially if it comes largely from investments or savings.
2. Home equity loan or HELOC
This type of secured loan is based on equity loan in a house. A borrower should have between 15% and 20% of their home equity — a loan-to-value ratio (LTV) 80% to 85% – and usually a credit rating of at least 620.
In particular, the Tax Reductions and Employment Act no longer allows the deduction of interest on home equity loans unless the money is used for home renovations. Another option, similar to a home equity loan, is a Home equity line of credit (HELOC).
Both are secured by the owner’s house. A home equity loan is a loan that gives the borrower an initial lump sum that is repaid over a set period of time with a fixed interest rate and payment amount. A HELOC, on the other hand, is a line of credit that can be used as needed. HELOCs generally have variable interest rates and payments are generally not fixed.
3. Cash refinance loan
This alternative to a home equity loan involves refinancing an existing home for more than what the borrower owes but less than the value of the home; the additional amount becomes a secured cash loan.
Unless there is a shorter term refinance, say 15 years, the borrower will extend the mortgage repayment term. When deciding between a refinance and a home equity loan, consider the interest rates of the old and the new loan, as well as the closing costs.
4. Reverse mortgage loan
A reverse mortgage (also known as HECM — Home Equity Conversion Mortgage) provides regular income or a lump sum based on the value of a home. Unlike a home equity loan or refinance, the loan is only repaid when the owner dies or leaves the house.
At this point, typically, the owner or heirs can sell the house to pay off the loan, the owner or heirs can refinance the loan to keep the house, or the lender may be allowed to sell the house to pay off the loan balance. .
5. USDA Home Repair Loan
If you meet the low income cut-off and plan to use the money for home repairs, you may be eligible for a Section 504 loan through the US Department of Agriculture. The interest rate is only 1% and the repayment period is 20 years. The maximum loan amount is $ 20,000, with a potential additional grant of $ 7,500 for very low income senior homeowners if used to eliminate health and safety risks in the home.
To qualify, the borrower must be the owner and occupant of the home, be unable to obtain affordable credit elsewhere, have a family income below 50% of the region’s median income, and for grants, be 62 years of age. years or older and unable to repay a repair loan.
While it may be more difficult to qualify for retirement borrowing, it is far from impossible.
6. Car loan
An auto loan offers competitive rates and is easier to obtain because it is secured by the vehicle you are purchasing. Paying cash can save interest, but only makes sense if it doesn’t deplete your savings. But in an emergency, you can sell the car to collect the funds.
7. Debt consolidation loan
A debt consolidation loan is designed to do just that: consolidate debt. This type of unsecured loan refinances your existing debt. In general, this can mean that you will pay off the debt longer, especially if the payments are lower. Also, the interest rate may or may not be lower than your current debt rate.
8. Student loan modification or consolidation
Many older borrowers who have student loans do not realize that failure to pay this debt can result in partial withholding of their Social Security payments. Fortunately, student loan consolidation programs can simplify or reduce payments by adjournment or even abstention.
Most federal student loans qualify for consolidation. However, Direct PLUS loans to parents to help pay for a dependent student’s education cannot be consolidated with federal student loans that the student has received.
9. Unsecured loans and lines of credit
Although more difficult to obtain, unsecured loans and lines of credit do not put assets at risk. Options include banks, credit unions, peer-to-peer loans (P2P) (funded by investors), or even a credit card with a 0% introductory annual rate. Only view the credit card as a source of funds if you are sure you can pay it off before the low rate expires.
10. Payday loan
Almost anyone, including retirees, may or may not qualify for a secured or unsecured short-term loan. The salary most retirees enjoy is a monthly Social Security check, and that’s what they borrow against. These loans have very high interest rates and fees and can be predatory.
You should only consider a short-term or payday loan in an emergency and when you are sure there is money to pay it off on time. Some experts say that even borrowing against a 401 (k) is better than getting tricked into one of these loans. If they are not repaid, the funds will be renewed and the interest will multiply rapidly.
The bottom line
Borrowing money in retirement is less difficult than it used to be, and many alternative options for accessing money are now available. For example, those people with whole life insurance policies might be able to get a loan by borrowing against their policy.
In addition, lenders learn to treat borrowers’ assets as income and provide more options for those who are no longer in the workforce. Before withdrawing money from your retirement savings, consider these alternatives to keep your nest egg intact.