HELOCS and Early Retirement?

[ERetire]

Now I'm confused....how does this work and how is it calculated. Is this during the draw down period or the loan repayment period?

 

[Finance Dave]

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!

I opened one a few months ago. I agree you should do it, but with a caveat. I would not charge anything that you could not pay off in a short time, such as a year. Why? interest rate is floating...and can rise rapidly. Many comments have used the words "low interest" loan...but it may end up not being "low" in a year or two.

As for watchouts....

Mine requires that I use it at least once a year.
I had to pay a small fee to set it up. That fee is refundable to me if I keep the line open for at least 2 years. An appraisal may also be required.
My line will only stay available for 7 years.
If you use it to pay off your house, check to make sure you won't lose your homestead exemption...you probably won't since the HELOC will hold a lien on your house...but check to be sure.
Ask about the rate rules. For example, if you borrow $50k at 3%, and the rate goes up to 4%, does that rate apply to only NEW borrowings? or even the $50k you already borrowed?

 

[Finance Dave]

Now I'm confused....how does this work and how is it calculated. Is this during the draw down period or the loan repayment period?

It's during the loan repayment period. If you borrow $100k, and your HELOC has the 2% clause...you'd have to pay a minimum of $2k the first month.

Mine has a clause like this...can't recall if it's 2% though....I think ours may be 1%. Doesn't bother me...I want to pay back in about 3 years anyway (use mine to buy rentals)...so we pay very aggressively.

 

[Finance Dave]

by the way, someone said you should not have to pay ANY fee for a HELOC...as then you're paying to lend them money. I disagree. What you're paying for is the cost to set up the HELOC...there is an administrative fee. A bank has two choices. They can add that cost into their overhead, thereby increasing the rate slightly...or they can charge it as a separate fee. For mine, it was $300, but is refundable if we use the line for 1 year.....so essentially they are guaranteeing they get their money one way or the other.

If they did not do something similar, there would be the risk that thousands of people would open HELOCs and never use them...thus putting them through a lot of costly work for no payoff.

 

[ERetire]

Thanks Finance Dave,

I have definitely learned a lot from folks like you who have already experienced the "in-n-outs" of HELOCs....and that's what I needed.

 

[FUEGO]

I opened one a few months ago. I agree you should do it, but with a caveat. I would not charge anything that you could not pay off in a short time, such as a year. Why? interest rate is floating...and can rise rapidly. Many comments have used the words "low interest" loan...but it may end up not being "low" in a year or two.

The interest rate uncertainty risk is one reason I like the Penfed 5/5 ARM HELOC. You know what you are paying for 5 years, and what the maximum you will be paying in subsequent five year periods so you can plan and act accordingly. But in general I agree - incurring a lot of debt on a variable rate loan that can change monthly or quarterly could leave you paying a lot of interest if rates shoot up rapidly.

 

[skipro3]

My home ownership is sacred to me. A HELOC puts a lien on my home. Why would I put up a $400,000 collateral for a loan of as little as a few dollars? Too many times "chit happens" with paperwork to risk saving a few bucks on a short term interest rate....

 

[yakers]

I have a HELOC I took out just before I retired 4 years ago for $100K about 25% of the value of my house. It gets automatically renewed every 5 years if I don't cancel it. The loan is from my old work credit union and does not have as good a rate as the Penfed discussed in this thread. I took out the loan for possible emergencies and possible expenses for younger son who is finishing college this year. Nice to have as a resource. Only used it once in buying a travel trailer, let me close the deal for cash and paid it off in less than a year. I have thought I might use it if I wanted to buy a car for cash and it might take too long to liquidate equities in my trading account.

 

[Nords]

My home ownership is sacred to me. A HELOC puts a lien on my home. Why would I put up a $400,000 collateral for a loan of as little as a few dollars? Too many times "chit happens" with paperwork to risk saving a few bucks on a short term interest rate....

To you it may be sacred, to someone else it's just dead equity.

To be punctiliously correct, you're not risking $400K of collateral unless you have a $400K HELOC and write a $400K check on it. You're only giving them a lien at the country record for the HELOC, and there's only collateral at risk if you draw on it.

In other words, except for the lien part, it's like a credit card. You only take on as much debt as you're willing to handle. Except this particular emergency fund has a much lower interest rate.

Your reasons for not having a HELOC are different from someone else's reasons for getting a HELOC. They're just different reasons, and neither reason is "better" than the other.

 

[Wrirya]

To you it may be sacred, to someone else it's just dead equity.

To be punctiliously correct, you're not risking $400K of collateral unless you have a $400K HELOC and write a $400K check on it. You're only giving them a lien at the country record for the HELOC, and there's only collateral at risk if you draw on it.

In other words, except for the lien part, it's like a credit card. You only take on as much debt as you're willing to handle. Except this particular emergency fund has a much lower interest rate.

Your reasons for not having a HELOC are different from someone else's reasons for getting a HELOC. They're just different reasons, and neither reason is "better" than the other.

I have to agree. A free and clear property puts a target on your back for unscrupulous attorneys and fortune seekers at your loss, i would recommend looking to lien all properties even just with a separate company that you own that is not the company that owns the property. If you are going to doit, do it right make regular payment , have a note, file taxes ect. From my experience it is worth it.

 

[REWahoo]

...i would recommend looking to lien all properties even just with a separate company that you own that is not the company that owns the property. If you are going to doit, do it right make regular payment , have a note, file taxes ect. From my experience it is worth it.

Sounds like a lot of trouble. What is your experience?

 

[Wrirya]

Sounds like a lot of trouble. What is your experience?

Fraudulent claims, workers, slip and fall, law suits, I have seen it all either directly, clients or friends. I have a friend that a kid got his eye poked out form icicle. Sad no question. But there is no way for an object above your head to injure your eye unless you are looking up at it and ben directly under it. There is no question in my mind the kid was knocking them down for fun and looking up at them. Insurance paid for medical but the unscrupulous attorneys went after everything until they realize it was fully encumbered and then they settled with insurance.

 

[skipro3]

I have to agree. A free and clear property puts a target on your back for unscrupulous attorneys and fortune seekers at your loss, i would recommend looking to lien all properties even just with a separate company that you own that is not the company that owns the property. If you are going to doit, do it right make regular payment , have a note, file taxes ect. From my experience it is worth it.

In my case, I had my estate planning attorney put my house title in my trust. The trust owns the house, not me. A primary reason is so that I can not loose my house to some liability law suit. I've got most all my large assets in the trust fund. This also makes it easier to transfer if something should ever happen to me. Also, I couldn't be forced to liquidate the asset for any personal debt I might incur. I can still get a HELOC against the house as well if I chose to.

 

[Nords]

Any of you attorneys on the board care to weigh in on the ability to pierce a trust set up for these purposes?

 

[WanderALot]

The interest rate uncertainty risk is one reason I like the Penfed 5/5 ARM HELOC. You know what you are paying for 5 years, and what the maximum you will be paying in subsequent five year periods so you can plan and act accordingly. But in general I agree - incurring a lot of debt on a variable rate loan that can change monthly or quarterly could leave you paying a lot of interest if rates shoot up rapidly.

I think this is the reason to only go with Penfed for a 5/5 HELOC and not for their standard HELOC. Their standard HELOC looks like it has a 1.5% min payment (P+I) and their 5/5 HELOC has 2% min payment. Their standard HELOC rates can be matched or beaten, so it's not worth the 1.5% min payment to do it. A 5-year fixed rate LOC at these low rates is a steal!

We closed our 5/5 HELOC when we refi'd. As soon as our new loan closed (not with Penfed), I opened up a 5/5 HELOC with them. The only difference was that our new HELOC is only for 50K since that's the max that I can open without paying for an appraisal (regardless of what your LTV is).

 

[RetireBy90]

I had a HELOC with the old Wachovia - now Wells Fargo. This was in the wild days, but they charged nothing and gave me a $100K then upped it to $250K. No closing costs. While I do like the Penfed, and do much of my savings there, I like the idea of having a person I can go sit down and talk to when needed. I moved couple years ago, so had to close the HELOC and don't have one currently. However, I'd suggest checking out a bank along with Penfed. One other option, I was looking at a rental last year, and needed to be able to put $50K down in short time if the deal came through. Penfed gave me a personal line with little hassle and it still sits there approved. Since it is un-secured it would be more expensive than HELOC but if you plan to use it only short term the costs wouldn't be that expensive.

 

[Wrirya]

Any of you attorneys on the board care to weigh in on the ability to pierce a trust set up for these purposes?

Come on attorneys.. I would love to hear your thoughts. I currently have a loan on my home but this year it will be gone. I am not sure what tondo to protect my home once it paid off. Lots of ideas but have not made a choice yet.

 

[skipro3]

Come on attorneys.. I would love to hear your thoughts. I currently have a loan on my home but this year it will be gone. I am not sure what tondo to protect my home once it paid off. Lots of ideas but have not made a choice yet.

If you haven't already, you should really meet with an estate planning attorney. He should be able to set you up with a family trust, durable power of attorney for medical, durable power of attorney for financial, a living will and a final will. Cost is usually around $1500 to $2000 and they handle all the paper work.

Here's the guy I used for an example;
http://drobnylaw.com/

Here's a page from his site on "Designating a Trust as Beneficiary of Individual Retirement Account Benefits
http://drobnylaw.com/ira1.html

By having your estate in a trust (including your retirement savings) you won't loose it all if you get seriously ill or incapacitated in order to qualify for Medi-Cal
http://drobnylaw.com/medical.html

If you have dependents / children, you really should consider a conservatorship
http://www.drobnylaw.com/articles/cship.article.012010.pdf


Unlike a financial planner, an attorney has a fiduciary responsibility to you, not him.

Having all your assets protected by placing them in a trust is a pretty good thing to do. Remember O.J. Simpson? He lost the civil suit against him for the wrongful death of his ex-wife. The judgement was for millions of dollars. But old O.J., he's out there on the golf course, living life large and the victims can't collect. Why? Because he has his assets in a trust fund. A civil suit is for only personal assets. A trust is not a personal asset. Hence, they can't be touched by anyone until the money is pulled out and put into a personal bank account.

 

[Wrirya]

If you haven't already, you should really meet with an estate planning attorney. He should be able to set you up with a family trust, durable power of attorney for medical, durable power of attorney for financial, a living will and a final will. Cost is usually around $1500 to $2000 and they handle all the paper work.

Having all your assets protected by placing them in a trust is a pretty good thing to do. Remember O.J. Simpson? He lost the civil suit against him for the wrongful death of his ex-wife. The judgement was for millions of dollars. But old O.J., he's out there on the golf course, living life large and the victims can't collect. Why? Because he has his assets in a trust fund. A civil suit is for only personal assets. A trust is not a personal asset. Hence, they can't be touched by anyone until the money is pulled out and put into a personal bank account.

I have done all of that and meet with the attorney annually, my understanding of the OJ is different, my understand is the money they can not get to is the NFL pension. I realize the pension and retirement funds are protected form creditors, BK, law suites ect. I am not as convinced the trust will do that. I have heard differing sides and a whole lot of rumors nothing concrete. I also believe that attorneys are salesman and want to sell their time. Also if you ask enough attorneys you will get different answers. I call that opinion shopping. Just my two cents

 

[skipro3]

Pensions are pretty much untouchable. I had my home burned down by an arsonist. Lost everything and a person died. The arsonist has a pension. While the judge awarded me financial restitution for many 100's of thousands of dollars, I'll never see any of it and the pension is untouchable.

Also, having your home in a trust avoids probate. It must be deeded to the trust and titled to the trust.
http://www.drobnylaw.com/articles/review.letter.2011.final.pdf

Regarding attorneys being salesmen, in this instance, the attorney is paid a flat fee. I paid a flat fee anyways and he doesn't charge me for minor changes; say I open a new bank checking account. I open it in the trust name and he adds it to the documentation.

 

[Wendy]

I figured I'd post my question here instead of a new thread. I'm also considering PenFed's 5/5 HELOC to serve as a source of emergency cash if we need money before we can tap our IRA money in about 5 years. We'd be fine with a limit of $50k or whatever we can get without closing costs, and would be unlikely to need it until 3-4 years from now, if at all.

So this HELOC sounds perfect, except someone cautioned in another thread that some people have trouble drawing their money when they need it. (http://www.early-retirement.org/forums/f28/cash-bridge-to-er-60061.html) Has this been a problem with PenFed? The comments here all seem positive.

Our alternative is to take cash-out when we refi our mortgage, but I hate to borrow money that I might never need, despite the low rates.

 

[Nords]

So this HELOC sounds perfect, except someone cautioned in another thread that some people have trouble drawing their money when they need it. (http://www.early-retirement.org/forums/f28/cash-bridge-to-er-60061.html) Has this been a problem with PenFed? The comments here all seem positive.

Not so far, but several HELOC lenders froze or even reduced the limits on HELOCs during the credit crunch. I think the HELOCs were frozen because the lenders were running out of liquidity, not the homeowners.

I don't thing a retirement would cause PenFed to declare an individual credit crunch... we've refi'd several times over the last 10 years of ER and all the lenders care about is the cash flow from pension, interest, & dividends. They care nothing about assets, even if you have enough assets to pay off the mortgage.

Six or eight years ago, Fidelity used to offer a mortgage secured by the value of an investment portfolio-- effectively a fixed-rate margin loan for buying real estate. That stopped in a hurry when home values began dropping.

 

[Wendy]

Thank you, Nords. I don't know how PenFed would view our post-DH-retirement cash flow, since it's less than our current income but still reasonably good. I guess we'll have to live with the HELOC freeze risk, although it sounds like it might more likely with banks vs. CUs. If only I could reduce all my risks and predict the future, then I could really sleep at night.

BTW, I have enjoyed reading your posts here over the past five or so years. If it wasn't for all the discussions about carrying a mortgage into retirement, I probably wouldn't feel as comfortable with the idea as I do (although ours is 10 years, not 30). Now I view it as a cash flow management tool more than a weight around my neck, or something equally daunting.

 

[Nords]

Thank you, Nords. I don't know how PenFed would view our post-DH-retirement cash flow, since it's less than our current income but still reasonably good. I guess we'll have to live with the HELOC freeze risk, although it sounds like it might more likely with banks vs. CUs. If only I could reduce all my risks and predict the future, then I could really sleep at night.
BTW, I have enjoyed reading your posts here over the past five or so years. If it wasn't for all the discussions about carrying a mortgage into retirement, I probably wouldn't feel as comfortable with the idea as I do (although ours is 10 years, not 30). Now I view it as a cash flow management tool more than a weight around my neck, or something equally daunting.

Thanks!

I think a conservative assessment of the risk would be "once every 20-30 years." But I'd never heard of it happening before.

 

[Wendy]

I think a conservative assessment of the risk would be "once every 20-30 years." But I'd never heard of it happening before.

I can live with a 20 year risk event. And I assume you mean you never heard of PenFed freezing credit. Just in case, I'll keep in mind that the HELOC isn't a sure thing and make sure we have other options lined up.