A question often asked is whether there are age requirements for home equity loans or home equity lines of credit (HELOCS). These products are structured like ordinary mortgages, with repayment schedules that can span three decades. Taking out a 30-year loan when you’re young shouldn’t be a problem. However, once you hit your 60s, the chances of living long enough to see that time frame unfortunately become much slimmer.
Key points to remember
- It is illegal for lenders to discriminate and deny credit based on age.
- Older applicants are treated the same as younger ones: they need a reasonable amount of home equity and must prove they can afford the monthly payments.
- Just because you can borrow money doesn’t mean you should.
- A loan will give you a nice cash injection, but could hamper day-to-day finances in the long run.
- If you die before your debt is extinguished, it will become, unless you have credit or life insurance, the responsibility of your heirs.
Senior homeowners have plenty of net worth to tap into
One of the benefits of home ownership is the ability to extract the home equity you have accumulated in the form of a loan or line of credit at competitive prices. This option may be particularly attractive to seniors, who are more likely to have already paid off their mortgage or be close to doing so. They generally have fewer opportunities to generate additional income on top of what they receive from Social Security and any retirement accounts, which in some cases may not be enough to cover an unforeseen emergency or a large one-time expense.
Homeowners aged 62 and older would have been sitting on a record $10.6 trillion in home equity at the end of the fourth quarter of 2021. According to a study by the Urban Institute, they are increasingly open to the idea of exploiting this resource to meet their needs. vital needs.
The amount that owners aged 62 and over collectively own in real estate.
How old is too old?
If you’re one of the many people worried about being too old to get a home equity loan or HELOC, you can put those worries aside. It is illegal in the United States to discriminate against and deny credit based on race, religion, national origin, gender, marital status, or age. Thanks to the Equal Credit Opportunity Act (ECOA), a federal civil rights law introduced in 1974, lenders cannot use age as a reason to deny your application for a home equity loan or HELOC. In other words, it is theoretically possible for even a 100 year old to get approved for a 30 year mortgage.
This does not mean that older homeowners are guaranteed to be welcomed with open arms by creditors. Like everyone else, they will need to prove they are sane with money, financially secure and can afford the monthly payments.
If your retirement savings plan pays out a decent fixed monthly income, you can get a pass. However, if it falls short and barely covers your living expenses, you may not have a good chance of getting one of these loans.
Income isn’t the only thing lenders look at. They also require that you have good home equity, a healthy credit score, and a history of paying off debt.
The risks of home equity loans and HELOCs in old age
Just because you can borrow money doesn’t mean you should. Yes, age will not affect whether or not a lender accepts your application. However, that doesn’t mean being older isn’t important.
Think carefully about whether you want to go into debt at this stage of your life. When people retire, their earning capacity often deteriorates. Gone are the days of full-time work, when bonuses, raises, overtime, promotions and side jobs were a possibility. Now you have a fixed amount to live on and fewer prospects to increase that figure if needed.
Although a home equity loan may offer fixed rates, taking out a line of credit with variable interest rates could be particularly risky for someone in this situation. If inflation rises, that little extra wiggle room you had for emergencies or extras could disappear.
If you are unable to repay an equity debt in your home, the lender may sell the home you used as collateral to collect what is owed to them.
We’re not just talking a few years here. These loans are long-term commitments that may well outlive you. The average American has a life expectancy in 2022 of 79.05 years, but they can theoretically borrow money at the same age and agree to pay it back over 30 years.
If you die before settling the debt and your heirs are unable to fulfill your obligation, your home is at risk of foreclosure. This is not a nice gift to leave to your loved ones.
One solution – if you can afford the premium and are not deemed too risky – is to take out a life or credit insurance policy. With life insurance, a predetermined death benefit is paid on the death of the policyholder, which can be used to cover expenses you leave behind. Credit insurance, on the other hand, specifically pays off existing debts in the event of death or disability.
What is the difference between a home equity loan and a HELOC?
The differences between a home equity loan and a HELOC are significant. With a home equity loan, the borrower receives the proceeds as a lump sum payment and is usually charged a fixed interest rate. Conversely, a HELOC allows the owner to borrow money as and when needed, up to a predetermined limit, and normally comes with a variable interest rate.
What credit score is needed for a HELOC?
It depends on a variety of factors, including your home value, home equity, how much you want to borrow, and your debt-to-income ratio (DTI). Generally speaking, you may find it difficult to be approved for a competitive loan if you have a credit score below 700.
Can you pay off a home equity loan sooner?
Yes, although some lenders may discourage you from doing so by imposing heavy prepayment penalties.
Age will not necessarily prevent you from being approved for a home equity loan or HELOC. However, that doesn’t mean being older is irrelevant.
Once you reach a certain age, your earning power decreases and the likelihood of dying increases. If you don’t take these risks seriously, you could be stripped of your home and forced to leave your heirs a much smaller inheritance.