Should You Take Out a Home Equity Line of Credit in Retirement?, #77
Taking out a line of credit on your home can be a great wealth management strategy, but it can also feel like a scary process. Who should you get the loan through? How long do you have to pay it back? Why should you even do it in the first place? On this episode, I’m going to tell you the seven things you need to know about home equity lines of credit as it relates to retirement and give you the confidence to make the best decision for your financial future.
You will want to hear this episode if you are interested in...
What is a home equity line of credit? [1:48]
How do you get a HELOC? [02:56]
How is a HELOC paid back? [4:19]
What are the costs associated with a HELOC? [5:00]
Reasons why you should consider a HELOC [5:43]
Things to consider before opening a HELOC [8:22]
Why HELOCs are better than taking out a traditional loan [10:16]
Defining a HELOC and the best way to get one
A home equity line of credit (HELOC) is a loan that you take out against your primary residence. You can also take out a HELOC against a rental property, but it usually works best with your main home. These types of loans require you to have equity in your home to qualify and most banks lend up to 80 or 90 percent of that value. Meaning you can take the loan out against a house with no mortgage or as a secondary mortgage. While I always recommend living a debt-free lifestyle, there are advantages to using a HELOC as your primary mortgage. Even though your house is likely one of your largest assets in retirement, none of that equity is liquid cash. Setting up a HELOC prior to retirement allows you to access that equity in the form of a loan.
Getting a HELOC is fairly simple. My recommendation is to apply for one through a local bank or credit union because they typically have fantastic rates for these lines of credit. How much a bank will loan you depends on how much equity you have in your home and your income to debt ratio. As I mentioned earlier, you should apply for a HELOC before retirement because income usually decreases once you stop working, making you a less desirable loan candidate from the bank’s perspective. As with any loan, you will need to provide documentation of your income, assets, and tax returns, but it’s not as grueling of a process as applying for a traditional mortgage.
The logistics of a HELOC and why it can be beneficial
Most HELOCs allow you to use the line of credit for 10 years, essentially like a credit card backed by your house. They give you a checkbook that can be used for whatever you need. You can pay your bills, pay your insurance, and even pay yourself. If there is a balance on the account at the end of 10 years they typically give a 15 year repayment period to bring it down to zero, but you can obviously pay it off before then. You also have the option to refinance a HELOC before the end of the 10 years to extend your credit line an additional 10 year period.
The following are reasons why you should consider opening a home equity line of credit if you’re approaching retirement:
It can be used as a backup plan for stock market decline
Interest rates are very low
It can be used as an alternative emergency fund
It can be a great option to cover long-term care needs
For more information on HELOCs and things you should consider before applying, listen to this episode!