Now, more than ever, seniors are retiring with large amounts of debt. It’s hard enough to keep up with the credit card bills when you have a steady salary. It’s much harder to do so on a small fixed income. Most seniors do not have the option of getting a second job to pay off the debt. Instead, they turn to more sensible solutions, such as debt consolidation and reverse mortgages.
What is debt consolidation?
Debt consolidation is a good option for seniors with credit card and other high-interest debt. With debt consolidation, you take out a single low-interest loan and use that money to pay down the high-interest debt. It’s much easier to keep track of a single monthly payment than of many smaller ones. Plus you save a fortune in interest payments. You can either get a secured loan, using your house as collateral, or an unsecured loan. The interest on an unsecured loan will be significantly higher.
Video: Debt Consolidation Tips
Many seniors are asset-rich but income-poor. This means that they have valuable assets, such as a house, but have trouble making ends meet day-to-day. If this sounds like you, then you have several options. The most obvious option is to sell your house and move somewhere cheaper. Once the kids are out of the house, many people don’t need the extra space. It’s just a hassle when it comes to cleaning. However, not everyone is able or willing to move. The experience can be very traumatic. Also, in the current housing market, you may not be able to sell your house even if you wanted to.
The second option is getting a reverse mortgage. A reverse mortgage is exactly what it sounds like. You take out a loan using your home as collateral. It’s a form of equity release. You can either get a lump sum or multiple payments. You do not have to worry about paying back the loan, or even the interest. When you move or die, the lender gets to sell your house and keeps the money.
The amount that you can borrow depends on a number of factors including your age and the value of your house. The main benefit to this arrangement is that you can stay in your home as long as you like. The downside is that you do not get to leave the house as an inheritance. Also, the money you get from the lender will be significantly less than what the property is worth.
Video: Reverse Mortgage Rules
What does the AARP recommend?
If you’re not sure how to proceed, the AARP recommends that you talk to a credit counseling service. Make sure that whoever you talk to is trained and certified through the Association for Financial Counseling or The National Foundation for Credit Counseling. That way you know they are legitimate.
Both debt consolidation and reverse mortgages can be useful tools in managing your finances. But it’s crucial that you understand the terms of the deal. Many seniors get trapped in contracts that they do not understand. It’s ok to admit that money matters can be confusing, but it’s better than losing your home or your life savings.