A How-To Guide
Should I dip into savings or finance treatment?
If you have an adequate amount of money in savings, think about whether it would be better to finance dental treatment using savings or to finance it through some other method. If you are currently getting a good return on your investments, is it better to take out a loan? What are your other choices? These questions can be answered by Patient Relations Director, Pat Martin. Below you will find basic information about the most common forms of financing.
There are two types of loans. A secured loan is loan that has an asset (collateral) backing it up. A mortgage is a secured loan that uses your house as collateral. A car loan is also a secured loan. An unsecured loan is not backed up by collateral. Because lenders take a bigger risk when providing you an unsecured loan, interest rates are higher. Credit cards are designated as unsecured loans.
What type of loan is best for you?
Home equity loans: These are fixed rate loans available in terms ranging from 5 to 15 years. When you take a home equity loan, you borrow the money all at once and start repaying it immediately. The best deals often come from local banks or credit unions. Closing costs vary from about $300 to $500. These are good for projects where large amounts of money are needed at one time. The interest rates on this type of loan are less than most others.
If part of the payment was needed several months after the initial payment, a bank account could be created to hold the amount of the second payment. This would keep the money safe during the interval and allow it to gain a small amount of interest.
Home equity lines of credit: (HELOC) These are variable rate loans with interest rates that are usually tied to the prime rate (with a lifetime interest rate cap at 18 percent. Unlike home equity loans, you do not have to borrow all the money at once. You receive the equivalent of a checkbook and withdraw and pay back funds as needed. These are ideal when funds are needed over time. You only pay interest on the money that you have withdrawn. Fees for this type of loan vary and are less than home equity loans.
Cash-out refinance: It is possible to draw out additional equity that you’ve paid into the home or equity that has been acquired through appreciation of your property. This differs from the home equity and HELOC loans because you are not taking out a second mortgage and has advantages and disadvantages. Advantages – As long as you are not drawing out all or more than the equity in your home, interest rate will generally be lower than any of the other options. A greater amount of the mortgage interest is also deductible. Disadvantages – You will require a new appraisal and face additional costs. These are best when you have seen a drop in interest rates since the original mortgage was taken out.
If interest rates are higher it doesn’t make sense to pay a higher rate on all of the money you owe on your house. If rates have gone up and you still need to draw funds from your house, a home equity loan or HELOC is a better choice. This allows you to pay a higher rate only on the incremental portion.
Also, refinancing can require you to pay mortgage insurance. This additional cost may make the home equity loan or HELOC the better option.
Reverse mortgage: If you are a older individual, consider a reverse mortgage. These are loans that allow you to borrow back the equity in your principal residence. You must be 62 years of age to qualify for a reverse mortgage. The amount you can borrow depends upon your age, the value of your home and current interest rate. There is no credit or income requirement. There are no monthly payments to make and the loan does not have to be paid back until you sell your home, die or move out for a period of one year or more. Payout from a reverse mortgage can be provided in a lump sum, a line of credit or a monthly payment. With the line of credit option, you do not have to pay interest on money that you have not withdrawn. In fact, your line of credit will continue to earn interest while it is waiting to be used. (See the reverse mortgage calculator at aarp.org/revmort/.) Be sure to learn all of the details of a reverse mortgage before deciding this is right for you.
Loans against your whole life insurance policy: Whole life insurance policies accumulate cash values. Some of the money you pay into your whole life policy accumulates as a guaranteed cash value. If you choose to surrender the policy, these guaranteed cash values would be available to you. Or, as long as the policy is in force, you may borrow against them as a policy loan at the current policy loan interest rate.
The amount of your guaranteed cash value depends on the kind of whole life policy you have, its size and how long you’ve had it. The growth in cash values is tax deferred under current federal income tax law. Borrowed amounts reduce the death benefit and cash surrender value until they are repaid.
Feel free to call our office to schedule a comprehensive diagnostic workup and to discuss your dental needs and payment options. We will be happy to answer your questions.
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