As one year comes to an end and the start of a new year rolls around, many reflect on their financial situations. It may be time to pay off debt accumulated over the holidays or borrow for other reasons.
Fortunately, if you’re a senior looking for affordable ways to access cash in 2023, there are multiple options to consider. Here are three:
First up is life insurance. You may be wondering how you can getIn short, permanent policies come with a “cash value” component that you can withdraw from or borrow against. Note that policies don’t have this feature.
You can typically borrow up to a certain percentage of your accumulated cash value, such as 90%, and then can pay it back whenever you’d like. However, interest will accrue, so the longer you take to repay the amount, the more you’ll owe. Lenders may also let you withdraw your cash value and avoid interest charges, but doing so will decrease your death benefit.
Another aspect to be aware of is that any amount you borrow will be secured by your death benefit. If you pass away with an outstanding balance, it’ll be deducted from the amount your beneficiary receives. On the upside, there are generally no credit or income checks. Further, the interest rates are often lower than those on a personal or home equity loan.
To decide if this is the right path for you, it can help to ask yourself a few questions. “Is the policy thought of as an additional savings account? If so, borrowing might make sense. If there’s a specific need that requires the entire sum at death—perhaps not so much,” said Warren Ward CFP, a financial advisor at WWA Planning and Investments.
If you own a significant percentage of your home and are at least 62 years of age, amay be a good option for you.
As the name suggests, it works like a backward mortgage. Instead of making payments to the lender, the lender assesses an amount you can borrow based on your equity and pays you. You can often choose between receiving monthly payments, a lump sum, or a credit line. Then, interest and fees will accrue over time.
The main upside to a reverse mortgage is that you won’t have to repay the amount you borrow while you’re living in the home. The balance becomes due once you pass away or when the home is no longer your principal residence The downside comes if you wanted to leave behind the home to an heir. They’ll have to pay off the reverse mortgage in order to keep it.
“Reverse mortgages are best when you need a steady flow of cash and you have equity in your home,” said Michael Collins CFA, a financial advisor at WinCap FInancial.
If you’ve built equity in your home, cash-outallow you to borrow against it. They involve getting a new larger mortgage loan, paying off your existing mortgage, and keeping the rest to use as you please. The new loan amount (plus interest and fees) will be split into monthly repayments over a set term.
These loans are secured by your home so if you don’t make the payments as agreed, your home can go into foreclosure. You also typically can’t borrow the full amount of equity you have available. The loan-to-value will often be set around 80% to 90%.
On the upside, Collin says, “A cash-out refinance may offer a lower interest rate than other options, allow you to access a larger amount of money, and may be tax-deductible.”