HELOCS and Early Retirement?

[ERetire]

I am 55 and will be retiring in June 2012. I'm wondering about setting up a HELOC before I leave my employer.

Here are the details:

I have 1.6 million in assets, however only $265,000 (Cash & Bonds) is not in retirement accounts (Traditional IRA, Roths, etc.). My house is worth about $500,000 with a mortgage balance of $164,000. In addition I have a $160,000 rental property that does not have a mortgage.

I want to live on a lifestyle withdrawal of $72,000/ year. In running the numbers I may not quite make it to 59.5 to begin IRA withdrawals without penalty. I know I can use the 72(t) SEP route and potentially sales houses, etc.......but I may not want to go through that.

However the thought occurred to me that I could set up a HELOC now and it would allow flexibility in those decisions in the future. I'm assuming it would be best to apply for one before I stop working. I have always heard it is best to apply for credit when you don't need it.

Anyone out there set up a HELOC to have some "dry powder in the keg" when planning early retirement? What were your thoughts?

 

[tightasadrum]

It never hurts to have a line of credit, especially with interest rates so ridiculously low. I also left megacorp around 55, but decided to work a few more years in a different, less demanding job four days a week with flexibility. This allowed me to withdraw only enough to make up the difference and fund travel. I would have a problem borrowing money to live on. Sadly, the lender it seems always wants the money paid back with interest.

 

[Wrirya]

If there is a chance you would want the heloc get it now , because you won't be able to latter. The key is be careful how you use the money. I would do it, any chance you can get the house paid off before you quit the job

 

[brewer12345]

Sounds like an excellent idea to me. I found an untapped HELOC to be a very helpful option in a time of liquidity stress.

 

[FUEGO]

You can get them for free from PENFED. Decent rates last I checked. Since getting one wouldn't cost anything, I don't see the downside.

 

[Nords]

Anyone out there set up a HELOC to have some "dry powder in the keg" when planning early retirement? What were your thoughts?

Very handy, we use ours all the time and might actually have to order more checks...

 

[Donzo]

I retired in 06 - I set up a $100,000 HELOC with Citibank before leaving employment. I have used it several times. It has been handy if I run low on cash before a CD has matured. I can pull some cash out and repay after maturity.
It's nice to know you have low interest cash available.

 

[arky]

Very handy, we use ours all the time and might actually have to order more checks...

Is this to cover unexpected expenses when other money is tied up (for example, a CD) or are you talking run of the mill expenses ?

 

[Nords]

Is this to cover unexpected expenses when other money is tied up (for example, a CD) or are you talking run of the mill expenses ?

Whenever we can't use a credit card and the amount of the purchase is more money than we have in our checking account. It might be in anticipation of next month's CD or while we're waiting for a call option to expire in a couple months.

A HELOC check is easier than giving someone a checking-account check and saying "Please don't deposit that for another 24 hours while I move some money around!" Instead I'll give them the paper, then go home and transfer funds from a money-market account to the HELOC. It usually takes PenFed 2-3 business days to catch up with a HELOC check.

We wrote a number of HELOC checks to the contractors while they were renovating our familyroom. Every two weeks for nearly 100 days. They don't do credit cards and the boss really didn't want that big a wad of cash changing hands in front of the employees.

Yeah, I know, I could just write a check from the money-market account too... but that doesn't always have money in it. This is the way we live when I know that I have a pension check and a rent check coming at the start of the next month.

 

[plex]

It sounds like an ideal way to spread out the cost of an extremely expensive year, so you don't get hit with a big tax bill that particular year in order to pull from your retirement accounts. However, probably not the best way to handle run-of-the-mill expenses.

 

[OldGuy]

After the first decade of ER, we've used our HELOC for "larger" purchases where, as Nords wrote, there might not be enough in the transaction account to pay for it. The new lakeside deck; the '04 'Vette; the things you just have to have... It's also a way to set up at-our-option repayment schedules at tax-preferred rates, rather than have to peel away the layers of financing offers to reach the real cost of borrowing. The HELOC's been a handy borrowing vehicle for us.

 

[ERetire]

Thanks for everyone's post.

It looks like a overwhelming yes....now I will have to investigate the details and do the shopping. What are the costs, do they cancel the line in a certain amount of time if not used, if you cancel the HELOC do they charge, do you do business with your local bank or go online? etc.

Interesting that a couple of folks referenced PENFED. Why?

Thanks again!

 

[Nords]

Thanks for everyone's post.
It looks like a overwhelming yes....now I will have to investigate the details and do the shopping. What are the costs, do they cancel the line in a certain amount of time if not used, if you cancel the HELOC do they charge, do you do business with your local bank or go online? etc.
Interesting that a couple of folks referenced PENFED. Why?
Thanks again!

PenFed is among the nation's best credit unions, #3 in size of deposits, and usually has the best interest rates on mortgages. Not always the best rates, but frequently.

New Year’s Resolution: joining NFCU, PenFed, and USAA | Military Retirement & Financial Independence
Scroll down about halfway.

Anyone & everyone can join. (I don't think you even have to be an American, but I've never checked.) If you don't have one of the many affiliations to the military or the DoD or another qualifying organization (https://netmember3.penfed.org/NetMember/Forms/OpenAccounts/Eligibility.aspx) then you make a one-time $15-$20 donation to one of two military charities, and you're in.

They frequently run specials for zero-closing-cost HELOCs. Other times you just pay a fee to appraise your home and they pay the rest. (They'll probably appraise your home online and avoid even that fee.) The deal is that you have to keep the HELOC open for at least two years, although you are not required to maintain a balance on it. There's no threat of cancellation, although if you canceled the HELOC within that two-year period you'd pay a few hundred bucks of their closing costs.

You do it all online. In fact, one of the most frequent complaints about PenFed is that it's hard to reach a human being in their mortgage department. You'd need to be comfortable with doing the whole thing by e-mail, and maybe visiting a notary to finish the paperwork.

 

[brewer12345]

There is one gotcha with the Pen Fed HELOCs. They require a monthly payment of 2% of the outstanding balance. Since most lenders only require payment of monthly interest, I would shop around elsewhere.

 

[JDARNELL]

There is one gotcha with the Pen Fed HELOCs. They require a monthly payment of 2% of the outstanding balance. Since most lenders only require payment of monthly interest, I would shop around elsewhere.

I wonder if this is a new change or I just haven't noticed? I have an interest only HELOC with PENFED at 2.75%.

JDARNELL

 

[Nords]

There is one gotcha with the Pen Fed HELOCs. They require a monthly payment of 2% of the outstanding balance. Since most lenders only require payment of monthly interest, I would shop around elsewhere.

I wonder if this is a new change or I just haven't noticed? I have an interest only HELOC with PENFED at 2.75%.
JDARNELL

I'm afraid I usually don't carry a balance long enough to notice either. I'd have to read the fine print.

I'm not sure how long I had last month's check on the HELOC, but I don't think I paid a 2% balance on it.

 

[OldGuy]

A coupla criteria to keep in mind as you shop around:
+ There are HELOC loans, and HELOC Lines of credit. Or at least there used to be both animals when we got our line 8-9 years' ago. One draw & (usually) immediate payback with a HELOC loan, versus the capability to take multiple draws over a period of time, and a longer payback period, with a line of credit. Ours has a 10 year draw period, and any outstanding balance at the end of that time converts to a 20 year payback. It's also with the holder of our first mtge, but that pays off in September, so we'll see how badly they want to keep our business. You should be able to deal with most lenders as the end of the draw period approaches, and roll the line into a new HELOC.
+ Given the appropriate LTV ratios, FICO scores, etc., etc., lenders are s-l-o-w-l-y getting back to lending money, but are faced with greately decreased borrowing demand. Should give you some leverage in negotiating terms & rates.
+ Shop around. Great referrals from these posts; but don't overlook local lenders if personal contact is important to you.
+ Never pay fees for a HELOC. Maybe an appraisal charge, but you should not have to pay for the privilege of paying additional interest when you borrow.

 

[ERetire]

Thanks Nords for posting the link. You have given me more to think about.

From OldGuys description its sounds like what most folks on this board are using a Home Equity Line of Credit that can be drawed upon in small amounts through checking convenience.

Thanks everyone.

 

[Sesq]

There is one gotcha with the Pen Fed HELOCs. They require a monthly payment of 2% of the outstanding balance. Since most lenders only require payment of monthly interest, I would shop around elsewhere.

The 2% thing is to prevent people like me using it as a backdoor no closing cost mortgage refi, with massive flexibility since its a line of credit.

I considered doing it anyways thinking I could always pay 2%, then draw on the line as needed to make up the shortfall from writing such a big check (I owe 275K on a 425K house, but have some hefty stock grants vesting over the next couple years) but decided it was too risky in the event that they froze the line.

If it was a 1% minimum payment, which is about what I pay anyways I would have done it. Instead I refi'd into an ARM with minimal out of pocket. Can't wait to pay it off.

 

[45th Birthday]

There is one gotcha with the Pen Fed HELOCs. They require a monthly payment of 2% of the outstanding balance. Since most lenders only require payment of monthly interest, I would shop around elsewhere.

I have a Pen Fed HELOC (variably rate line, not fixed rate loan). I have had it a few years at least. Very useful to fund fluctuations and settlements in investments. Won't use it much when rates go back up, though.

Never had to pay anything but the interest monthly. Are you talking about a home equity loan instead of a HELOC?

 

[brewer12345]

I have a Pen Fed HELOC (variably rate line, not fixed rate loan). I have had it a few years at least. Very useful to fund fluctuations and settlements in investments. Won't use it much when rates go back up, though.

Never had to pay anything but the interest monthly. Are you talking about a home equity loan instead of a HELOC?

Nope. Last I looked, this was their current terms on their lines of credit.

 

[Nords]

Nope. Last I looked, this was their current terms on their lines of credit.

I'm going to have to sit down with a calculator & calendar to check, but it looks like they're still just charging me 2.75% APY.

I haven't dug up my terms, either, but I'm pretty sure the 2% payback wasn't due until after the 10-year draw was over. Not that I plan to wait until then to find out.

It's all too easy to believe that the 2%-every-month term came about in early 2009...

 

[brewer12345]

I'm going to have to sit down with a calculator & calendar to check, but it looks like they're still just charging me 2.75% APY.

I haven't dug up my terms, either, but I'm pretty sure the 2% payback wasn't due until after the 10-year draw was over. Not that I plan to wait until then to find out.

It's all too easy to believe that the 2%-every-month term came about in early 2009...

They probably have fiddled with terms and conditions a number of times. Here is the current language straight from the horse's website:

"Repayment will be the greater of 1 ½% of principal balance outstanding (2% for the 5/5 ELOC), $100, or the finance charge due."

 

[FinanceDude]

Get a HELOC before you retire. I have two clients that can't jump on some RE at ridiculously low prices because they don't want to liquidate investments to purchase it. Both are retired and wish they had gotten HELOCS because their houses have been paid off for a long time.

Also could help with unforeseen medical bills, etc.........

 

[Nords]

They probably have fiddled with terms and conditions a number of times. Here is the current language straight from the horse's website:
"Repayment will be the greater of 1 ½% of principal balance outstanding (2% for the 5/5 ELOC), $100, or the finance charge due."

Painful. And only the interest can be deducted on taxes.

If I want to pay back 1.5-2% every month then I guess I have to borrow 105-110% of what I really need...