How Herocs can help retired homeowners manage expenses
Americans are sitting on record amounts of home equity, and older homeowners, who spent decades paying down their mortgages and have seen home surges in recent years, are uniquely positioned for income.
The problem? Research shows older homeowners are reluctant to step into their property, even though home equity loans and traditional long-term lines of credit (Heloc) have begun to gain traction among consumers in general. Helocs, in particular, see abuse with popularity, due to their versatility.
With a heloc, you can get approved for a line of credit, usually up to 85% of the value of your home away from the debt. You only pay interest when you actually borrow from the line of credit. You can also borrow multiple times over a multi-year term, giving you more control over the amount of debt you take on compared to a standard loan.
“I find it to be a useful and valuable tool for almost anyone at home,” said David Kerber, certified financial planner and managing director of Mercer Advisors.
If you eliminate home equity, the average American’s Net worth will drop by more than half, according to the research center. So older homeowners who can’t achieve their home equity in their financial plan completely limit their options, Kerber said.
Also, the tax change next year adds another benefit to Helocs. Between 2018 and 2025, the interest paid on the Heloc was exempted only if the loan was used to “purchase, construct or substantially improve a residence,” according to IRS rules. Starting in 2026, however, you can reduce the interest paid on the Heloc used – what? purpose (although you should see your reduction).
Can you actually retire and get helocs?
Lenders are not allowed to “ignore” older people from applying for home loan products, according to a consumer protection agency.
But you’ll still need to meet the lender’s financial requirements for a line of credit, and that can be a big challenge if you’re an older homeowner who doesn’t have regular payments.
For that reason, says Neil Krishnaswamy, a certified financial planner based in McKinney, Texas, it may be better to set up a heloc if you’re near retirement and still have a regular income.
If you are already retired, you can show that you have the income-to-credit ratio needed to manage a heloc with social security payments, although you may need to shop around for a lender that will give you a good deal.
If you still have a mortgage, Kerber recommends starting with a mortgage lender, because they can get an appraisal and give you a lower option. You want to pay as few fees as possible when you get a line of credit especially for a backup loan, she said. A bank where a long-term relationship exists is a good first stop, too.
Before you take out the first line of credit they offer, however, it’s worth researching what else is on the market. Two mortgage lenders have recently introduced heloc products designed specifically for older homeowners that can offer better approval opportunities (and better terms) for those who receive income. There are some lenders that offer HEATOCs designed for debt consolidation.
Unlike traditional helocs, which often have variable interest rates, these products often have fixed interest rates, which can work better for retirees depending on how they plan to spend it.
Krishnaswamy says, in most cases, he likes the idea of getting a line of credit and using it as a source of liquidity. “You have the flexibility, and then the other part of the decision is whether you actually use it,” he said.
How to use a heloc in retirement
You can spend Heloc dealing with just about anything. But just because you can access hundreds of thousands of dollars and spend it freely doesn’t mean you should. In general, you don’t want to rely on debt to finance day-to-day expenses, and you want to make sure you have a plan to pay back whatever you take out, Kerber says.
Make sure you look at the long-term costs. Most Helocs are designed for two parts: the draw period and the repayment period. During the drawing period – which usually lasts between five and 10 years – you must make interest payments on any loan you have taken out. When the draw period ends, you’ll then enter into repayment, and the amount you owe each month can jump significantly since you’ll be paying principal and interest.
And it’s smart to compare the interest rate you’ll pay when it’s time to tap a line of credit with the rates you get elsewhere, Krishnaswamy says. In an ideal world, a heloc just adds to your range of financing options, so if the rates aren’t appealing when you’re ready to spend, you can look elsewhere.
Here are four smart retirement ways to use the money from a Heloc.
Complete home renovations and resurgence of aging
About 9 in 10 seniors say they would like to age in their own home or that of a friend or family member, according to the AP-Norc Center for Public Affairs Research. Yet most homes in the US are built with aging in mind.
In that sense, RETIREES are like many other consumers considering a Heloc: Research consistently shows home repairs as the number one reason homeowners tap the line of credit.
Common renovations to make a home safe for long-term aging range from inexpensive ones that may be easy on the pocketbook — think installing built-in cabinets — to expensive projects that require financing. Projects such as widening walkways to accommodate a walker or wheelchair or fully renovating a bathroom to create more space and eliminate launch hazards quickly add up to tens of thousands of dollars.
Pay off high interest debt
Traditional financial rules seek to enter retirement with no debt – or at least, as little debt as possible. For many people, however, the reality is different.
A recent AARP study found 42% of adults ages 65 to 74 carry a credit card balance, and 35% of adults 75 and older have credit card debt. If you’re one of them, you might want to look into tapping your home equity to pay off your expensive debt. Debt consolidation, where you replace multiple debts with a single, low-cost loan, is the second most common use of a heloc, according to a survey from fintech company MeridianLink.
With typical credit card applications sitting at around 22%, swapping that debt for a heloc, the current average rate of which is around 8%, can lead to huge savings.
You want to make sure you fully understand all the fees involved and how much you will pay in interest. That’s standard protocol when borrowing money. But if you borrow money to pay off the other loan, it is very important.
Also, traditional Helocs often come with lower Teasers that increase later, making the calculations more difficult. Try to get a fixed amount consolidation option so you know exactly what you will owe in the long run.
Ultimately, you want to make sure you can pay off the new loan for less than the credit card debt. It’s also critical that you also want to avoid the trap of taking on new credit card debt while paying down your traditional Heloc.
Consolidate your tax liability and investment account withdrawals
One of the biggest benefits of setting up a heloc is that it gives you the option to access the money at strategic times.
In the final years of retirement, for example, you may be considering various moves with tax consequences, such as converting a traditional IRA to a ROTH IRA so you can make free withdrawals. You’ll have to pay taxes when you convert an IRA, so you’re probably trying to keep other tax liabilities as low as possible, Krishnaswamy said. Since mortgage loans are not considered taxable income, drawing cash from home equity can increase your cash flow without affecting your tax bill.
Similarly, access to a heloc can help you avoid withdrawals from your investment portfolio during periods of market volatility. Of course, any exercise that occurs during the market comes with risk, and using a heloc to ride out the market turmoil assumes that the economy will be doing better when you have to pay off your debt.
Tax strategy and portfolio management are some of the more complex uses of Heloc, and it’s worth talking to a financial planner to make sure you understand all the nuances.
Cover emergency expenses
When Kerber talks to clients who are taking out their retirement plans, they go through all of their investment options and access to capital. “The more flexibility we have with the plan and the more options we have, the better,” he said.
He describes a heloc as a tool that can provide quick access to cash, should you need it to cover major auto repairs, unexpected medical expenses, a broken home claim and more. Some people may be able to keep enough cash in savings to cover all of this instead.
But there are sellers. Keeping all of your emergency funds in cash means money won’t keep up with inflation, she said. The exact allocation of money, investments and financing that works for you will depend on your feelings about credit and risk tolerance. But having all three gives you options.
“We can say, ‘Okay, we have huge medical expenses. Let’s sit down and come up with a plan,'” Kerber said. “Do we use cash? Do we use credit? Do we use another instrument?”
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