What is the Best Way for Seniors to Eliminate Debt
- Reverse mortgage as an option to eliminate debt
- Benefits of debt consolidation for seniors
According to the research, there are two main target groups who are the first to be affected by economic downturn from credit perspective – young and seniors. There groups remain the most vulnerable borrowers in United States and have been affected the most comparing to other populations groups. This article will briefly examine the ways of debt elimination for seniors and look into what debt elimination strategies are available to them.
One of the main alternatives available to seniors is debt consolidation which offers the opportunity to leverage on the property such as home. There are two ways to do it, one is to obtain a secured loan backed by the equity accumulated in home and second one is to arrange reverse mortgage. Such consolidated loan would have higher security and lower risk incorporated in its structure and, thus, would allow senior to repay debt which bears higher interest rates.
Reverse mortgage is an excellent option for seniors and is applicable for those borrowers who have already reached the age of 62 in United States. The reverse mortgage would allow seniors to repay their mortgage in full or, alternatively, arrange a credit line that would be readily available for use in the form of monthly withdrawals. The main advantage for reverse mortgage is that in order to apply for it a senior should not necessarily have outstanding credit history. In principal terms, credit history does not matter allowing seniors with any credit history to apply for Federal Housing Administration loans. Such loans are issued and controlled by the government and represent a special form of credit specifically targeting senior American citizens.
Another main advantage is that reverse mortgage allows a senior to repay all outstanding unsecured debts and provides certainly for the future in the form of low monthly repayments as per Graph 1. It is one of the most commonly used means of debt elimination for seniors. The downside is that the home of seniors is put on stake and is a subject to the risk of potential foreclosure. The advantages of debt consolidation prevail only for those seniors who have large stakes of debt such as more than USD17,000-20,000. It is important to keep in mind that debt consolidation also involves large arrangement fees and other costs that are not justified, if the debt is relatively small. In United States total costs involved for debt consolidation vary from 2.5-5% of total loan or house market value.
Graph 1: How Debt Consolidation Works
There are several other options available such as use of services of professional financial advisors that negotiate on your behalf better terms and conditions with current debt providers. This is the last resort option as it would strongly deteriorate the credit history of a senior borrower. Another option is to use services of firms that provide credit counselling. Such companies would usually prepare a tailor-made debt management plan for seniors and reduce the time of total debt repayment. This option also has a strong negative impact on credit ratio of the borrower. So from credit rating perspective debt consolidation is one of the best ways of debt elimination for seniors.
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