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Home Equity Line of Credit Or Unsecured Personal Line of Credit?
Old 05-01-2008, 02:06 AM   #1
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Home Equity Line of Credit Or Unsecured Personal Line of Credit?

Hi, Im Todd and I'm looking to retire early. I am concerned about financial emergencies that I haven't planned for. One example would be unforseen medical problems, but I'm sure there are hundred of others. My current personal dillema is as follows:

There seems to be a consensus view that (HELOC-S), that is Home Equity Lines of Credit are the great emergency product for a retiree in a financial crunch and I happen to disagree. I believe that a Personal Unsecured Line of Credit at a reasonable interest rate (maybe 2-5 points above prime) is a much safer deal for a retired person. I would not want to be in a position where my shelter was on the line when I retire if I do not have the money to meet a monthly loan payment. The lenders promote the correct tax advantages for HELOCs and the interest rate is cheaper, but would you not sleep better at night when you are retired knowing that your shelter was not on the hook for missing a payment? I would sleep better and maybe that's all that counts! BTW, I am not promoting default, maybe a borrower like myself, if I got into a cash crunch, could work out an arrangement on an Unsecured Personal Line of Credit to make the payments lower, but if I sign away my home as collateral, I'm afraid that I'd have no bargaining power with the lender. Some unscrupulous lender types would rather get my home at an auction price than have any interest in renegotiating better terms or an easier payment of my HELOC. I may just be paraniod, but I would not want to end up retired without shelter.

I'm thinking of applying for the Personal Unsecured Line of Credit and obtaining it while I'm still working so that the lenders will give me higher credit limits (becuase of my current working income as opposed to retirement passive income). I would only use the credit in case of an emergency as I do not want any extra debt. What are others thoughts on this subject, or am I just way out there in loony bird territory? Maybe just too much time on my hands?

I am second guessing myself (only becuase of the lower interest rates for Home Equity Line) but it's only a few points difference. So I would like others input. Please reply as I am currently weighing my options and this is a almost a split decesion, but I am obviously leaning towards Unsecured Personal Line of Credit, but I haven't applied for them yet. What would you do?
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Old 05-01-2008, 03:23 AM   #2
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I don't know the first thing about Unsecured Personal Lines of Credit, but I imagine that they would be contingent on you maintaining a certain amount of income. Just like HELOCs are contingent on your house maintaining a certain amount of equity (as many HELOC owneds are discovering right now).

They may also be very expensive. Have you looked into them?
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Old 05-01-2008, 03:26 AM   #3
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By the way, I'll also add that for a lender to go after your home when you default on a HELOC is not 'unscrupulous' behaviour. When you enter into a HELOC, you, as a sovereign, thinking, adult citizen, are entering into a contract which involves pledging your home as collateral.
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Old 05-01-2008, 03:31 AM   #4
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"Some unscrupulous lender types would rather get my home at an auction price than have any interest in renegotiating better terms or an easier payment of my HELOC"

Please don use out of context as I agree that a contract is a contract and should be honored, but my emphasis was on renegotiating better terms rather than kicking a retiree on the street.

But based on your answer, I believe that the Personal Unsecured Line is safer in case of emergencies!
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Old 05-01-2008, 03:45 AM   #5
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BTW, I didn't consider that the lender may indeed reduce my limits as my income goes down, just like when equty goes down on a home, so that is something to definately consider as I don't know the asnwer to that.

Also, the Unsecured lines are about 3-8 point higher depending on you credit score, but mine is very high so it would only be about 3 points Higher.

But your freightening answer is that a Banker looks at it as just as another loan or line backed by security and whether you are retired or not doesn't matter. Very freightening, but true!
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Old 05-01-2008, 04:18 AM   #6
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Helocked - I agree its a safer option, and the peace of mind may be worth 3 points for
you. I would definitely read the fine print re changes in income though.

Good luck, and welcome to the board.

How soon are you thinking of retiring?
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Old 05-01-2008, 04:30 AM   #7
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I would not use a HELOC for emergency funds. I might use a HELOC for temporary funds until I could free up my emergency funds if they were not in a cash equivalent.

My advice. Save up an emergency fund. If you do not have it... cut your spending, save, and keep your fingers crossed.
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Old 05-01-2008, 07:18 AM   #8
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"Some unscrupulous lender types would rather get my home at an auction price than have any interest in renegotiating better terms or an easier payment of my HELOC"

One flaw I see is that a lender is interested in owning your house. I assure you, they are not, especially now when they have more than they can chew. Foreclosure would always be a last resort.

However, assuming that you can qualify for an unsecured line of credit, if it makes you sleep better to not have your house on the line, maybe it's better for you, even paying more.....
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Old 05-01-2008, 09:02 AM   #9
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"How soon are you thinking of retiring?"

I'm only 46 but I am financially about ready, prppable not emeotinally ready thoug. I'd say another 5 - 10 Years semi retired and then full retirement after that.

Do you folks think that is too early? Why?

My only worries (other than finances) is boredom as my kids will all be out of the house by then.
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Old 05-01-2008, 09:12 AM   #10
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Sorry about the spelling on that last post. Still cob webs in the fingers this morning.

I'm worried that if I get too bored, I may end up traveling and spending all of my retirement money. A voluteer job may be the answer - sonething in the line of coaching an athletic team.

Any of you retired yet and what do you do with boredom?
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Old 05-01-2008, 10:41 AM   #11
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HELOC in reserve would be my choice (currently 4.75% rate available if used it). I don't think you can get a unsecured/personal loan for 2% above prime (I cannot find any at that rate) even with a compensating balance. If you could what would the amount of the compensating balance needed and the return rate on that balance? Additionally, if the compensating balance is equal to or greater than the amount of the line, aren't you only borrowing your own money?
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Old 05-01-2008, 10:45 AM   #12
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Psst, margin loan.
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Old 05-01-2008, 10:55 AM   #13
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"if the compensating balance is equal to or greater than the amount of the line, aren't you only borrowing your own money?"

No balance required, just show income necessary to qualify and high credit rating to prove history of worthiness.

Most banks offer these, the trick is to know where (which lenders) to get the low rates. Some lenders will quote you 15.99%, but some that I know of are looking at 3%-8% above prime depending on your credit rating and mine is high enough to qualify for the 3% above prime.

So all in all, it's a little more than the interest on a HELOC, but not that much and there is absolutely no collateral needed. No Home Equity, no secured balance, nothing. Just your good name and proof of your income and credit rating to qualify.

That's why I'm thinking it's just a better deal than a HELOC... Maybe not the price, as the interest rate is a couple of points higher than a HELOC, but overall a better deal.

I'm probably going for it and I'll let you all know how it ends up.
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Old 05-01-2008, 12:08 PM   #14
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So what happens to the "personal loan" rate AFTER you are no longer working? Can the level available be reduced, interest rate increased on future withdrawals, capped with no further withdrawals allowed? I think you may not like the lenders recourse on the "personal loan" after you READ all of the protections for the lender versus your options. HELOC as an "emergency" fund has drawbacks (many of the same as mentioned above) too but, for someone who has been responsible, has an earned high credit rating, intends to repay the loan, it appears, at least to me, to be the better route. BTW "a couple of points" can get expensive if you use the line.
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Old 05-01-2008, 02:46 PM   #15
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Quote:
Originally Posted by brewer12345 View Post
Psst, margin loan.

Or sell equities in your taxable account to cover the emergency. You could rebalance, if needed, in your tax deferred.

DD
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Old 05-01-2008, 09:47 PM   #16
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Todd,
....You seem to be debating (mostly with yourself) whether you could sleep better at night with a HELOC or with a personal line of credit. Before I could ever even get to sleep at night I would want an adequate emergency fund or at least a part of my portfolio that I could quickly convert to cash rather than taking on debt to cover an emergency. Perhaps you and I have VERY different levels of comfort with different financial situations though.
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Old 05-01-2008, 10:07 PM   #17
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I noticed you posted this same question on the Federal Soup board today. There a number of "us" around here. I have a heloc, owe some $$ on it, wish I didn't and am working towards knocking it out. I don't plan to do it again.
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Old 05-02-2008, 08:07 AM   #18
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Ok,

I really thought about this and tried to imagine myself IN the scenario and here is what I would do and why.

I do not intend to sound self righteous but it is the thought process that I went through.


I'd take the HELOC ....

And here's why,

My house is paid off and the equity in the house is enough that IF I HAD to sell (even in today's market) I could sell, payoff the HELOC and get into another house that was still debt free and nice enough for my standards. This would be MY fallback plan to make good on debt I sign for (promise to payback)

Since I think that scenario has a VERY small chance of happening then I just look at the numbers .....

Say I did need $50K for an emergency ....

A heloc would cost $382/mo at 4.5% (15yr amortization) 4.5% is just above what my current rate is should I draw on my HELOC. PLUS I would have a tax advantage that would lower my effective rate further.

Without the HELOC say I could get the 50K at 7.5% (15yr too) --- That would be $464/mo = $82 difference min. ($14,760 over life of loan)


I am a LBYM type and will have a good health care plan and basic needs pension annuity plus 401k money.
I think the chances of a big emergency coming along that would force me to draw a loan that I could not pay off and force me to implement my fallback plan to sell and move into a lower cost residence are really small.

I would not be willing to pay the $82/mo premium for that small chance.

It just never really crosses my mind that I draw on a line of credit and not have a secure plan to repay it. Even if it means selling my home to cover the loan.

My logic is , why would I deny paying back the $$ I owe to someone else just because I want to live in a 3000 sq ft house instead of a 2000 sq ft house.

So since I would go in with that mindset of having a plan for payoff before I draw on the loan and a fallback plan if something happens that I could not payoff as expected then of course i would take the lowest rate possible.

I guess the big question is would you take a draw on a L.O.C. if you thought there was a decent chance that you might not be able to pay it off.

If you feel that you answer that question "of course not!" and you have a full proof way of paying off the loan you are promising to payoff then take the best rate/deal you can.
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Old 05-03-2008, 09:27 PM   #19
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Quote:
Originally Posted by helocked View Post
I'm looking to retire early. I am concerned about financial emergencies that I haven't planned for. One example would be unforseen medical problems, but I'm sure there are hundred of others.... What would you do?
I would set aside enough savings in liquid investments that I would be covered in the event of any reasonably foreseeable emergency; and in the last resort would sell my house and downsize to a smaller one.

I certainly wouldn't plan on debt financing.
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