Getting a HELOC before Retiring

[G-Man]

So, I got pre-approved to go up to 99% of my LTV which is the max borrowing amount that is offered by my credit union. However, the discount rate is higher than the rate in the 80.01% to 90% LTV tier.

Discount Rate:
80.01 - 90% LTV = 8.175%
90.01 - 100% LTV = 8.400%

I'm not sure what to do here. Take the max borrowing amount with the higher discount rate or the smaller borrowing amount with the better discount rate.

Any opinion?

Max borrowing amount from the credit union is $250K.

 

[G-Man]

So, I got pre-approved to go up to 99% of my LTV which is the max borrowing amount that is offered by my credit union. However, the discount rate is higher than the rate in the 80.01% to 90% LTV tier.

Discount Rate:
80.01 - 90% LTV = 8.175%
90.01 - 100% LTV = 8.400%

I'm not sure what to do here. Take the max borrowing amount with the higher discount rate or the smaller borrowing amount with the better discount rate.

Any opinion?

Any recommendation on what option I should choose?

 

[jazz4cash]

Ours only shows on our credit report when we use it, like a credit card balance would.

That seems unusual. All open lines of credit show up on my credit report even if they have zero balance. That’s part of the credit utilization ratio.

 

[jazz4cash]

Any recommendation on what option I should choose?

I haven’t read every post but I am confused why you would consider the higher LTV if it is really just for emergencies. Why did you choose not to go with Third Federal? Is there a minimum draw required to get the LOC? Those rates are pretty high.

 

[G-Man]

I haven’t read every post but I am confused why you would consider the higher LTV if it is really just for emergencies. Why did you choose not to go with Third Federal? Is there a minimum draw required to get the LOC? Those rates are pretty high.

Wanted to stick with a local bank or credit union. You are correct, that the HELOC will only be used for emergencies. I haven't looked at the rates from Third Federal since last year. There is no minimum draw.

 

[rayvt]

Wanted to stick with a local bank or credit union.

Why?
I can see having some money in savings/checking accounts at local bank(s), but loans?? Who cares? For loans, go with whoever gives you the best rate & terms.

 

[G-Man]

I'm building up my taxable account right now and decided not to go through with the HELOC loan at the moment. I may be retiring very soon so I'm still contemplating whether to get the HELOC now or wait until a couple of years in retirement when I can show steady income from pensions and social security.

 

[LateToFIRE]

DO NOT get a HELOC as an emergency back-up - chances are excellent it will be pulled precisely when you need it the most. Saw this happen to acquaintances during the Credit Crisis.

 

[Time2]

I'm building up my taxable account right now and decided not to go through with the HELOC loan at the moment. I may be retiring very soon so I'm still contemplating whether to get the HELOC now or wait until a couple of years in retirement when I can show steady income from pensions and social security.

I applied for one and got a Heloc with no* income. I just had to show my Vangaurd and IBKR statements for a few months. Might be bes to wait till you need it, I had a 6 month teaser rate at 0.99%, I only needed a 9 month loan. It worked out well.
If you have a substantial taxable amount, you might move it to IBKR because of their low margin rates. I used margin to buy a house (2021) The rate was 1.99%. However, I was close to 40% margin and it was suggested I get it lower, just in case the market collapsed they wouldn't sell to reduce my margin, thus the Heloc loan.


* I did have about $10k of dividends that were being reinvested.

 

[RetiredAt49]

DO NOT get a HELOC as an emergency back-up - chances are excellent it will be pulled precisely when you need it the most. Saw this happen to acquaintances during the Credit Crisis.

We opened a HELOC 1/1/2022 (the day I retired and the start of last year’s bear market. No income was required. That was part of our SORR plan (we have a 100% stock portfolio) and it worked flawlessly! Instead of selling stocks during the bear market, we used the HELOC and a “no interest for 18 month” credit card until the market improved. We easily could have sold stocks if we wanted too because the tools (e.g. Firecalc, ficalc.app, etc.) give us a 100% success.

 

[G-Man]

DO NOT get a HELOC as an emergency back-up - chances are excellent it will be pulled precisely when you need it the most. Saw this happen to acquaintances during the Credit Crisis.

So what are you recommending?

 

[G-Man]

I applied for one and got a Heloc with no* income. I just had to show my Vangaurd and IBKR statements for a few months. Might be bes to wait till you need it, I had a 6 month teaser rate at 0.99%, I only needed a 9 month loan. It worked out well.
If you have a substantial taxable amount, you might move it to IBKR because of their low margin rates. I used margin to buy a house (2021) The rate was 1.99%. However, I was close to 40% margin and it was suggested I get it lower, just in case the market collapsed they wouldn't sell to reduce my margin, thus the Heloc loan.


* I did have about $10k of dividends that were being reinvested.

I have no experience with Margin loans. What is the payment schedule on a margin loan? Can the interest rate be fixed or is it always a variable interest rate?

 

[Time2]

I have no experience with Margin loans. What is the payment schedule on a margin loan? Can the interest rate be fixed or is it always a variable interest rate?

I don't recall that there was any payment schedule, interest is floating.
That was my first and only margin loan. I borrowed to facilitate purchase of a fixer upper home for my daughter and SIL. I didn't want to incur taxes by selling any securities. I gave them a two year mortgage, 4% first year and 6% second year, as kick to get the home upgraded. They fixed and remortgaged in 9 months, very proud of them.

 

[COcheesehead]

We opened a HELOC 1/1/2022 (the day I retired and the start of last year’s bear market. No income was required. That was part of our SORR plan (we have a 100% stock portfolio) and it worked flawlessly! Instead of selling stocks during the bear market, we used the HELOC and a “no interest for 18 month” credit card until the market improved. We easily could have sold stocks if we wanted too because the tools (e.g. Firecalc, ficalc.app, etc.) give us a 100% success.

I am challenged to see how this tactic works in a falling market. You would owe money to a HELOC and a credit card and the source of the repayment is falling. That sounds like SORR X2.

 

[Montecfo]

Get an HELOC if you have significant home equity. Probably easier before retirement. Why wait?

Sure, it can be pulled in extraordinary circumstances. But if you never get one you pulled it yourself, under all circumstances.

 

[LateToFIRE]

We opened a HELOC 1/1/2022 (the day I retired and the start of last year’s bear market. No income was required. That was part of our SORR plan (we have a 100% stock portfolio) and it worked flawlessly! Instead of selling stocks during the bear market, we used the HELOC and a “no interest for 18 month” credit card until the market improved. We easily could have sold stocks if we wanted too because the tools (e.g. Firecalc, ficalc.app, etc.) give us a 100% success.

Glad it worked well for you - but that doesn't make it a great idea.

[Full disclosure, I have used HELOC's in the past too, mainly for property rehab, but have seen that they are not to be relied upon.]

 

[RetiredAt49]

I am challenged to see how this tactic works in a falling market. You would owe money to a HELOC and a credit card and the source of the repayment is falling. That sounds like SORR X2.

Your first three words might sum it up best (just kidding). However, what exactly is there to explain?

To cover our expenses, we could have done the following:
1) Sell equities while their prices are falling. Pretty obvious why that’s not ideal.
2) Leverage a no-interest, minimum payment, 18-month credit card + HELOC during a bear market and only sell minimal equities (actually dividends covered it) until the market improved.

Again, Firecalc and others show a 100% success rate (using option 1) but using other financial vehicles (especially during a bear market) can help protect a nest egg and reduce SORR. YMMV

 

[LateToFIRE]

So what are you recommending?

Cash out refi. Yes, there is negative carry (i.e. you might be paying interest for funds you might not need yet). But can offset some of that via cash equivalent investments like CD's, Treasuries, etc.

At least this way you have 100% certainty you will have access to the funds when you need it.

HELOC can be cancelled on a whim that has nothing to do with you, totally outside your control.

 

[old medic]

I think anyone with meaningful home equity would be wise to get one. Cost to put in place was zero and it is at my B&M bank where I have a 30+ year banking relationship.

We have tried several places and failed to get a HELOC even though we own both houses free and clear. We of course are doing a complete rebuild on the one house so cant use it. The other, my brother lives in. So I got to talking to our 30+ year B&M and they set me up with a Personal Line of Credit on just my Pension. Nice to have, easy to use.

we used the HELOC and a “no interest for 18 month” credit card until the market improved.

As said, I have a PLOC with the plans on finishing our house and get a HELOC prior to the DW retiring. We have been doing 0% interest game for several years buying building supplies to complete the house.

 

[Aerides]

DO NOT get a HELOC as an emergency back-up - chances are excellent it will be pulled precisely when you need it the most. Saw this happen to acquaintances during the Credit Crisis.

We got one in 2016, still have it. Far easier to get approved on two good incomes.

But it's far from our only emergency back up. We also raised CC limits, and planned for a very healthy non-taxable and cash portfolio aside from our retirement accounts.

It's just a matter of having as many tools at our disposable to consider if ever needed.

 

[G-Man]

We got one in 2016, still have it. Far easier to get approved on two good incomes.

But it's far from our only emergency back up. We also raised CC limits, and planned for a very healthy non-taxable and cash portfolio aside from our retirement accounts.

It's just a matter of having as many tools at our disposable to consider if ever needed.

Did you get the HELOC before retiring?

 

[rayvt]

I have no experience with Margin loans. What is the payment schedule on a margin loan? Can the interest rate be fixed or is it always a variable interest rate?

There is no payment scheduled or required. The interest rate is variable and they can change it at any time.

The margin loan can be called whenever they want to. The stocks in your account are the security. If the stocks go down enough, they WILL call it. They will sell as many of whichever stocks you have in the account to pay off the margin loan. It is completely up to them which stocks they will sell and how many shares they will sell. The margin clerks have a boatload of accounts they are calling, so count on them selling the stocks you'd want to keep and keeping the stocks you'd want to get rid of.

Most brokers have a high interest rate, but IBKR is usually by far the cheapest.

 

[COcheesehead]

Your first three words might sum it up best (just kidding). However, what exactly is there to explain?

To cover our expenses, we could have done the following:
1) Sell equities while their prices are falling. Pretty obvious why that’s not ideal.
2) Leverage a no-interest, minimum payment, 18-month credit card + HELOC during a bear market and only sell minimal equities (actually dividends covered it) until the market improved.

Again, Firecalc and others show a 100% success rate (using option 1) but using other financial vehicles (especially during a bear market) can help protect a nest egg and reduce SORR. YMMV

Your situation doesn’t necessarily translate to a good strategy for others. You got lucky with timing. Taking on debt to cover expenses in a falling market? Double whammy.

 

[LateToFIRE]

We got one in 2016, still have it. Far easier to get approved on two good incomes.

But it's far from our only emergency back up. We also raised CC limits, and planned for a very healthy non-taxable and cash portfolio aside from our retirement accounts.

It's just a matter of having as many tools at our disposable to consider if ever needed.

+1

I have nothing against HELOC's, just so long as people realize they are not reliable - undrawn portion is not a committed credit line, just like a credit card, can be cancelled with no notice. Doesn't have to have anything to do with your credit - bank could just decide, hey we have to cut risk or cut capital, or get out of that business.

Back before the Credit Crisis when they were handing them out like candy with no closing costs, I made prodigious use of them for rehab, home improvement, and yes, as emergency back-up until I saw how quickly can be pulled. Since then, low rate environment made cash-out refi my preferred option.

Now, I dunno, will just keep a certain amount of cash on hand for emergencies.

 

[1242Vintage]

I got a $200k HELOC with B of A before retiring against our primary residence. No mortgage on primary home and home value is right around $1 mil. No cost but It required a withdrawal for several months and there’s where I ran into a bit of an issue!

Took the withdrawal and I had my pal at Merrill simply park the withdrawal in Treasuries to offset the interest that we were paying.

Several months later both my buddy at Merrill and I got a letter from the Securities and Exchange Commission stating that they frown upon using home equity for investment purposes.

Have no idea how the SEC connected the HELOC and the treasuries. But they did and now there’s a warning letter in my SEC permanent file !!!!