• What is the cheapest home equity loan?

    Before answering this question, I think it is important to explain what a home equity loan is.

    What is a home equity loan?

    Normally when you get a mortgage on a home, you prove to the bank that you can afford it, and pass the stress test in many cases. 

    A pure equity loan is one where the lender doesn’t really care if you can afford it. In some cases, they don’t even require regular payments. They don’t even care if you pay the loan down over time like you would a conventional mortgage, where you make principle and interest payments.

    Why would a lender do such a thing?

    Lenders just want their money back, with interest. Some want it back in a short time. Some are willing to wait longer. But the lender minimizes their risk be securing it against the equity in the home. In other words, they are fairly confident that the value of the home is sufficient enough to pay them back by selling the home if something went wrong.

    So what is the cheapest way to borrow money against the home without qualifying in a conventional way?

    Short answer: reverse mortgage. Hands down!

    Why?

    Because the reverse mortgage lender is an institutional lender, that is a proper bank and not a private lender. They are willing to wait decades to get their money back, and they charge a very reasonable rate. You never make a payment. They only get paid when you move out or sell.

    Private lenders will also do this but they are better for short term loans as a last resort because they are very expensive.

    What’s the catch?

    1. You need to be over 55 years old. The older you are, the higher the likelihood that you will sell or move sooner, and the more you get.
    2. Depending on your age, you can only get usually less than half of the value of your home. That’s because the bank needs to protect themselves by building in a buffer.
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