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I’ve never seen this in any financial column anywhere:
I’ve told all my kids and anyone else who’ll listen to setup a HELOC on their home “just in case”. You never know when you’ll need cash, like when you’ve lost your job, and if you ARE jobless you won’t be ABLE to get a HELOC.
Notice I didn’t say Home Equity Loan. There is a difference between the two. I won’t go into that here, you can research that yourself.
A HELOC is a MUCH cheaper way to borrow money than using a credit card or a car title loan AND it costs you nothing to setup and keep “on the shelf”.
Another resource is to setup a whole life insurance policy but only with a non-direct recognition MUTUAL company. They buildup cash valve fast that you can use for emergencies if needed. If you research “infinite banking” you can learn about this.
We used a HELOC to build our current home on some acreage we had previously purchased. The HELOC had a fixed rate of 3.4% and no fees. It helped provide a smooth transition from our old home to our new home. The HELOC was paid off as part of the closing on our old home.
I once had a HELOC. I considered it to be strategic debt. I never used it, but it was there if I needed it. At the tme the bank offered 0 fees, which made it attractive. The unused amount was used by credit companies to calculate my credit score, which was improved.
I currently have a HELOC with no annual fee. I don’t expect to use it, but it is a nice tool to have access to should some unforeseen circumstances arise. To borrow your term, it is strategic potential debt.
I’m hesitant to give blanket financial advice to anyone that I don’t know some details about. Especially concerning debt on their personal residence that could lead to foreclosure. That’s very questionable advice. With that being said, in our personal experience over the last 30 years, HELOC’s have been instrumental in achieving wealth and financial independence, while also recognizing and taking necessary actions to minimize the consequences of that debt if things go south. Debt is a tool that if not used safely and cautiously can cause widespread carnage. Be careful out there, they shoot real bullets and good luck to you.
Boy you really kicked a hornet’s nest here!
Debt is a pretty serious subject to many here. And I expect we’ve all known folks that have been hurt by their debt.
I had a HELOC for a long time, it was used to pay for a kitchen remodel. I was in no position to save up for it at the time. I retired the HELOC when I took out a second mortgage. That’s a long story…
IMHO, debt is a tool. Like any other tool there are right ways and wrong ways to use it. Generally, I’m opposed to debt, but I’ve used many 90-365 days same as cash loans, car loans, as well as the home loans. What I’m really opposed to are subscriptions. I despise paying a monthly or annual fee without any clear value being delivered (exception is a magazine or newpaper, those are great if you read them, and cancel them if you stop).
In terms of the $50-75 annual fee to maintain it, that’s pretty cheap. If you are conservative and only spend $4000/mo, $75 is 15 basis points. No way if that were a monthly fee.
If you lose your job and think you need a loan to support your family, you should be darned sure that you are still employable.
Bottom line for me is; If you don’t know how or when you’ll be paying back a loan, you shouldn’t get one.
I’m not rich, but I have an aversion for debt. I hate it no matter the form it comes in. So when you say everyone should get a home equity line of credit “just in case” I cringe. Just begin saving up for an emergency fund. The last thing I want when I’m facing a financial crisis is more debt. You can never dig yourself out of a hole. Why is it so hard for people to just save money. Even if it takes years as it did for my wife and I it’s far better peace of mind than knowing I can borrow money against my house. And honestly the last thing I want to do is put the roof over my head at risk. That’s just the way I see a HELOC.
With all due respect I am unaware of any whole life policy that builds up cash value fast. And most, if not all mutual companies are direct recognition in that they penalize the dividend structure if you borrow from the policy.
Excellent advice for people without other readily accessed resources to turn to…..I used this idea years ago to get mother’s assisted living bill paid without tapping other resources that would have been taxable. Makes a lot of sense even if it costs a small fee to keep line in place. She was not going to outlive the line amount so we knew this payment source would be good for a couple years.
A Heloc is great to have in case you need to fund your ira or whatever. Usually minimal feeb to apply and small yearly charge. You might be able nowadays to deduct the interest on tax return
What’s a HELOC?
It’s hell to pay. I personally would stay away from it because it’s debt. The bank doesn’t just give you money out of the goodness of their heart.
Home equity line of credit.
Thanks
Entering mandatory retirement at 65, mortgage-free, we explored HELOC vs. HECM and eventually chose the latter after reading Wade Pfau’s Reverse Mortgages.
Fascinating book reference, thanks Rob!
Just remember a HELOC used or not is a factor in your credit score.
For most HD readers does their credit score really matter? Most likely their scores are in the 800s, own their home, pay cash for new vehicles, and most likely any decrease will result in a score dropping no lower than the high 700s.
Yes it does matter, since insurance companies base your auto, home, umbrella policies in part, on your credit score. Ditto when applying for a credit card.
Unfortunately it still seems to be used to determine insurance premiums.
You have a point, but I don’t know about “most” There are a lot of HD readers who never post and we never hear from.
A HELOC, depending on how well, or how poorly it is used, can either increase or decrease a credit score; truly a double edged sword.
Got one just before retirement while I still had regular income just as a back -up. In 8 years, I have used it once to help buy a car and paid it off within 2-3 months with irregular part-time consulting income.
I only give advice when I’m asked. 😜
I was charged $75/year to keep an open HELOC. It was our local bank.
My local bank charges $50. I passed on the ‘offer’.
Back in my 40’s after my divorce my HELOC helped me through single parenthood. Sometimes my budget was just too tight! It was a lifesaver. Now I have one because I would rather tap it instead of my IRA for my home improvement projects for my 1955 cracker box ranch house.
I did have a HELOC set up for emergencies, and at one point I was able to tap it at a moment of extreme stress, so it was worth it.
But it’s no longer needed.
We had a HELOC in place for a couple decades to serve as a backup for our emergency cash. Fortunately we never needed to tap it and finally closed it out, but it did give us peace of mind.
Excellent advice.
I used to have a HELOC when I used banks until about 5 years ago, now I use a Fidelity CMA for banking. The HELOC required minimum balances making almost no interest with the bank.
It really bugs me to have money I worked for not working for me.
After I closed my last bank account, I modified my Fidelity brokerage account for margin to simulate a HELOC. Current rate is 7.5% if you have over $1M with them and scales up to 11.875% for accounts with less than $25K. No tax deductibility unless you use it to buy investments (not me ever) and itemize.
I did use it to deal with a temporary shortfall when I fell in love with a sailboat. Didn’t want to sell stocks at the time, so I just withdrew the money needed and the interest began. When I deposited enough back to the brokerage, the interest immediately reversed directions from 7.5% debit to 3.3% credit (using current rates for illustration).
Banks have some real work to do to see me darken their doors again.
Really? These are financially good ideas?
How about asking the people that renovated their kitchen, went on a vacation, paid college tuition, and bought a new boat using their HELOC and are having trouble making the payments? How about contributing monthly to an emergency fund kept in savings or money market instead? Per bankrate.com, HELOCs have variable interest rates, so your repayments will increase if rates rise, and you can only borrow funds for a set period. Another risk: A HELOC uses your home as collateral, so if you don’t repay what you borrow, the lender could foreclose on it.
Whole life insurance policy? Let me guess, you sell these types of bad products?
Do not waste your money on either of these ideas and put your hard earned cash in a no fee savings account for your rainy day emergencies.
Here is a different opinion regarding HELOCs:
https://www.ramseysolutions.com/real-estate/home-equity-line-of-credit
As well as whole life insurance:
https://www.ramseysolutions.com/insurance/term-life-vs-whole-life-insurance
Just type in “Heloc Risks” in YouTube and listen..
That was a fun read. First Ramsey article for me, but of course I’ve heard about him. Not a big fan of debt, is he? : ) Me neither. He implies a good point about ongoing minimum checking/savings balances that idles money that should be making market rate interest (see my Fidelity post in this thread). The fees, repayment schedules, and minimum borrowing amounts he mentions are an issue.
A HELOC or any kind of debt should be entered into with care, but this doesn’t preclude its use when the costs are considered.
For which one of you, when he wants to build a tower, does not first sit down and calculate the cost, to see if he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who are watching it will begin to ridicule him, saying, ‘This person began to build, and was not able to finish!’ – Luke 14
Here is a brief discussion on HELOC interest deduction
https://www.investopedia.com/mortgage/heloc/tax-deductible/
Be aware of the tax deductibility rules for interest on a HELOC, they changed in 2017. The interest is not always deductible.
I am on year 9 of my HELOC, some years I have no balance. We most recently used it to purchase a new car and will have it paid off by the end of the year. When I set up the HELOC, interest payments were considered as mortgage interest and thus they are still tax deductible when you itemize. I will be sorry when the HELOC term ends in year 15. The interest rate is adjustable and set to prime plus 1.5 %.
Just for fun, the current prime rate is 6.75%, add 1.5% = 8.25%.
We will be using a HELOC when we change our deck into a three season porch. This will allow us to finance some of the cost over a few years without having to exceed the 12% tax bracket.
Does anyone know if there is a lender that consistently offers low cost/ no cost HELOCs? Haven’t had a chance to research yet.
Check your local credit unions.
Isn’t that what having an emergency fund of 3-6 months living expenses is for? Would I want to go into debt if I lost a job?
Excellent point. It’s far better to save up for a raining day. Then when you need the funds they’re there. Afterwards simply replace the funds. No stress, no anxiety, and no interest. It just takes discipline.
Ideally, we’d all sit on a pile of cash. The reality is, many of us don’t have this. I bet a lot of HumbleDollar readers have capital tied up in retirement accounts and are loathe to tap these funds, so alternatives like a HELOC for cashflow and borrowing management are important strategies to know about.
Right. I used a HELOC successfully during my first marriage when money was tight. Still, they can be a trap just like credit cards, except with the possibility of losing your house.
Dick, I am in agreement with you. I don’t see any reason for us to have a HELOC. We have a large emergency fund, so I don’t see why we would need one. Chris
Our HELOC was very useful when we downsized. We used it to help pay cash for our CanDoMinimum instead of a “bridge” loan.
It can be a backup if your emergency fund gets completed.
I guess so, but if I can’t replenish the emergency fund, how am I going to make loan payments? And if I am making loan repayments how will I ever rebuild the emergency funds?
Seems like a trap to me. I would use a HELOC only in the extreme situation.
The two things are not mutually exclusive. Diversity assists once again by providing choices. My HELOC costs nothing unless I use it. Hard to beat that price for quick access to 1 to 250k.
I’ve always been envious of the US HELOC product. If it was a thing in the UK I’d certainly have one.
I obtained a HELOC years ago when I knew I was going to lose my job after the company I was working for did not get their contract renewed. I didn’t know about them until a friend in town who worked for bank told me. I considered this insurance in case I was unable to find another position for an extended period of time. Luckily it was never needed. The HELOC closed when we sold our house and we did not get another on the retirement home we built. From my investment reading I believe it was a mistake not to have one in retirement as a contingency “fund”.