Should I consider a HELOC?

[googily]

Ages 69/60.
Have HELOC at 3.5% for $50K.
$45K utilized for kitchen renovation.
Stock market seems to be doing than 3.5%.

This is what I used ours for. In 2015 I needed a sizeable chunk of dough to buy out my dad and sibling on an inherited house. I had the cash from a recent land sale, but opted to invest that and use the HELOC for the payoff. Inherited house has now sold, HELOC is paid off from those proceeds, and I made a whole lot more in the stock market than 3.75% between 2015 and late 2017.

Doesn't always work that way, but it did for me.

I won't close the HELOC, in case I need it again.

 

[Danmar]

One possible downside is that they may (or may later) require more expensive insurance than you want. I dropped a HELOC for this reason.

I had HELOC’s when I retired and found they did indeed cause my insurance to be more expensive (15% higher!) so I removed them after it was clear I didn’t need the extra liquidity. Now I view margin loans (currently unused) as a potential source of emergency liquidity. But I keep enough cash on hand to cover all but the largest, most surprising emergency.

 

[jazz4cash]

Are there closing costs on establishing a HELOC?

It depends on the lender. We did not pay anything, but would need to repay the closing costs paid by the lender if we close the line within ~3 yrs.

 

[jazz4cash]

That's not correct. HELOCs were simply eliminated from the tax code and are therefore not tax deductible. The only exception might be if the money was borrowed for business purposes, as mine was. I used it to do improvements on a rental. I'm still waiting for a final answer from the CPA.

I am assuming that the interest will not be deductible, but one interpretation of the new tax law is that the term 'equity debt' was eliminated from the code but acquisition debt is still deductible so a HELOC may be deductible if the the total debt does not exceed the purchase price. It seems impractical to track this unless it's an honor system. Another gray area subject to interpretation by IRS.

 

[jazz4cash]

Lots of positives. Good idea to have a standby HELOC if you have significant home equity.

My mortgage is with Third Federal. I called them some time ago as they were promoting the HELOCs. As I recall, max was 150K. I am looking for more so did not pull the trigger. But they do have competitive and low fee the mortgages (at least the ARMs). Relock the rate at any time.

Good to hear from someone that has experience with TFS. I never heard of them before but so far they are exceeding expectations.

 

[SumDay]

Our fee-only financial advisor recommended we get one before we retire (since post-retirement is a tougher qualification process). And, if we have another 2008/09, we could pull from this rather than our IRAs and 401(k)s. No cost at our bank, and our 2.875% rate adjusts later this year to market. We haven't touched it in two years and hope we never have to. It's kind of our "break glass" back-up.

 

[REWahoo]

Our fee-only financial advisor recommended we get one before we retire (since post-retirement is a tougher qualification process). And, if we have another 2008/09, we could pull from this rather than our IRAs and 401(k)s. No cost at our bank, and our 2.875% rate adjusts later this year to market. We haven't touched it in two years and hope we never have to. It's kind of our "break glass" back-up.

Be aware that there may not be any glass to break. During the market unpleasantness in 08/09, many financial institutions canceled their home equity lines of credit.

 

[Tallman4123]

We took out a HELOC last year right before DW retired (I am already retired). No closing or any other costs. Ten year draw period; 20 year repayment term. I don't have plans to use it, but consider it a safety net. At the end of the ten years (I'll be 70), I'll consider a reverse mortgage depending on our financial circumstances.

 

[Senator]

That's not correct. HELOCs were simply eliminated from the tax code and are therefore not tax deductible. The only exception might be if the money was borrowed for business purposes, as mine was. I used it to do improvements on a rental. I'm still waiting for a final answer from the CPA.

Your rental interest is 100% tax deductible. HELOC or not. Get a new CPA if he says otherwise.

 

[43210]

One possible downside is that they may (or may later) require more expensive insurance than you want. I dropped a HELOC for this reason.

Are you saying that a bank may require insurance for the amount of the HELOC? Or they make you buy insurance from a more expensive insurance company?

Banks do not like high deductible insurance on properties for which they have loans. I tried to raise my deductible on the rentals to $5,000, but that was a nonstarter with a couple of servicers whose insurance departments actually review insurance.

I had HELOC’s when I retired and found they did indeed cause my insurance to be more expensive (15% higher!) so I removed them after it was clear I didn’t need the extra liquidity. Now I view margin loans (currently unused) as a potential source of emergency liquidity. But I keep enough cash on hand to cover all but the largest, most surprising emergency.

My experience, like others' is that at some point (after a "review", having had the HELOC for years), was that they suddenly started to insist on much lower deductible, which added a significant cost, making the HELOC no longer worth keeping.

 

[jazz4cash]

My experience, like others' is that at some point (after a "review", having had the HELOC for years), was that they suddenly started to insist on much lower deductible, which added a significant cost, making the HELOC no longer worth keeping.

I am missing something here. I've only ever carried 1k deductible and it's never been an issue for me with both lenders listed on the homeowner's policy. The 1st and 2nd notes total <80% LTV. The home is insured for 110% of market value, maybe more with replacement coverage, etc. In the event of total loss, the insurance should cover both loans and the equity. When I left State Farm 3 years ago, my premium dropped by 50%, so it pays to shop around if the premium seems unreasonable.

 

[Danmar]

I am missing something here. I've only ever carried 1k deductible and it's never been an issue for me with both lenders listed on the homeowner's policy. The 1st and 2nd notes total <80% LTV. The home is insured for 110% of market value, maybe more with replacement coverage, etc. In the event of total loss, the insurance should cover both loans and the equity. When I left State Farm 3 years ago, my premium dropped by 50%, so it pays to shop around if the premium seems unreasonable.

Many insurance co’s give a discount for being mortgage/heloc free. Mine did.

 

[brewer12345]

I went with Pen Fed for my latest HELOC. 15 year interest only draw period, all due at once after that. Don't ever plan to use it, but it is a nice backup.

 

[Cayman]

Be aware that there may not be any glass to break. During the market unpleasantness in 08/09, many financial institutions canceled their home equity lines of credit.

Good point. Anyone relying on a HELOC as a primary source of $ in a big downturn may want to consider an alternate plan. If that's not possible, you may try drawing your HELOC funds as soon as it's apparent we're in a downturn. This may (or may not) work. I'd have a plan "B".

 

[Just_Steve]

That's not correct. HELOCs were simply eliminated from the tax code and are therefore not tax deductible. The only exception might be if the money was borrowed for business purposes, as mine was. I used it to do improvements on a rental. I'm still waiting for a final answer from the CPA.

The above is not correct.

https://www.ocregister.com/2017/12/28/heloc-loans-might-still-be-deductible-under-new-tax-plan/


HELOC deductibility depends on whether it was “home equity indebtedness” or “acquisition indebtedness.” Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence — will be deductible, according to Michael Kitces, partner and director of Wealth Management at Pinnacle Advisory Group.

 

[Senator]

The only exception might be if the money was borrowed for business purposes, as mine was. I used it to do improvements on a rental. I'm still waiting for a final answer from the CPA.

HELOC deductibility depends on whether it was “home equity indebtedness” or “acquisition indebtedness.” Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence — will be deductible, according to Michael Kitces, partner and director of Wealth Management at Pinnacle Advisory Group.

Any HELOC interest for money used to acquire a rental property or used for a business purpose is also deductible through the business.

It may not be a personal deduction, but the business/rental can pay the interest and deduct it from their revenues, or suffer a loss and the individual can deduct the business loss on a pass-through entity.

 

[Scuba]

That's not correct. HELOCs were simply eliminated from the tax code and are therefore not tax deductible. The only exception might be if the money was borrowed for business purposes, as mine was. I used it to do improvements on a rental. I'm still waiting for a final answer from the CPA.

I thought that too at first but upon further reading, it appeared that HELOC interest may still be deductible if used for home improvement purposes. I’m also waiting for final answer from CPA, as I haven’t and don’t plan to read the actual law.

 

[Another Reader]

I'm waiting for the IRS to clarify. After all, they make the real "law."