How to Use a HELOC Strategically in Retirement

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If you’ve worked hard to pay off your house, taking on mortgage debt in retirement may sound as tempting as being chained to a 9-to-5 desk job.

But used wisely, a home equity line of creditthat allows you to borrow money for your home can be a powerful tool in preserving the longevity of your financial portfolio.

Here’s what you need to know.

How to use a retired HELOC

A home equity line of credit, or HELOC, allows you to call up the amount of money you need, up to the credit limit, when you need it. Typically, you have 10 years to withdraw funds and only pay interest on the amount you withdraw. You then have another 20 years to repay the balance plus interest.

A HELOC is not a way to support an otherwise unaffordable lifestyle. Instead, it’s an alternative way to manage your money. Here are a few smart uses.

Finance large purchases or projects

With a HELOC, you can spread expenses over several years so you don’t have to withdraw a huge sum from an investment portfolio at once, says Anthony Watson, board-certified financial planner and founder of Thrive Retirement Specialists in Dearborn, Michigan. Taking a large chunk out of retirement accounts can have tax implications — it could even put you in a different tax bracket — and you lose potential investment gains on the money you withdraw.

HELOCs typically have lower interest rates than personal loans and credit cards. Additionally, the interest may be tax-deductible if used for home improvement, Jon Giles, head of consumer direct lending at TD Bank, said via email.

Before you pull out of a HELOC, set a repayment timeframe that suits your goals, not just the lender’s needs.

Survive a bumpy investment market

Financial planners generally advise holding your living expenses in liquid assets — such as savings, checking, or money market accounts — for at least one to three years after you’re retired. This way you can rely on cash reserves when the market falls and avoid selling investments.

The downside is what financial planners call “cash drag,” the return you essentially don’t get by investing the money,” says Watson.

A HELOC allows you to invest some of that money while maintaining your coverage during a down market. Here’s how it works: You draw from living savings first, and then you can draw from the home equity line of credit if needed while investment markets recover. Then, when it’s a better time to sell investments, you’d pay back the HELOC, replenish the savings, and continue to draw on your investment portfolio, Watson says.

“Having a home equity line of credit for a market downturn so you don’t have to sell assets at an awkward time can be very strategic,” says Marguerita Cheng, board-certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“If you’re doing this, make sure you’re doing it as part of a coordinated financial plan,” Cheng says.

Eligibility for a retired HELOC

The average time from application to final approval for a HELOC is about 50 days and varies based on the complexity of the application, Giles said.

To decide if you qualify for a HELOC, lenders consider the following:

If someone is still working, the lender verifies income through payslips, W-2 statements, or tax returns.

“For a retiree, income is yet to be verified and may include retirement income, Social Security and/or retirement account income,” Giles said.

When a HELOC is a bad idea

A HELOC is not a good idea for every situation. In general, a HELOC makes no sense if you:

  • Planning to move in a few years. Lenders often charge a fee if the HELOC closes within a certain period of time after opening; a typical time frame is three years. When the home sale is complete, you must pay off the line of credit.

  • Think you or your spouse might be tempted to overspend with a HELOC. In this case, the HELOC may not be worth the risk of losing the valuable equity you’ve worked hard to build up, or worse, foreclosure for non-repayment of the HELOC.

  • need income. A HELOC is not designed to provide an income stream. However, a reverse mortgage can be an option if you are looking for a way to use home equity for home care or other living expenses in retirement.

HELOC tips for retirees

Here are some tips on acquiring and using a HELOC.

Shopping spree. Cheng recommends getting quotes from at least three lenders, e.g. Your bank, credit union, and online lender.

Understand the costs. HELOCs typically have variable interest rates, but some offer the ability to convert to a fixed rate. When comparing lenders, understand interest rates and how they can change, and ask about closing costs and if there are annual fees.

Attention: Banks can freeze credit lines. For example, during the Great Recession and housing crisis in 2008, many banks froze their home equity lines of credit. “It hasn’t happened recently, but you have to be aware of it,” says Cheng.

Be disciplined. Plan how you will use the HELOC and pay back the money drawn, then stick with it. “They don’t want to say, ‘I have this line of credit, I can just spend it now.’ That’s not the point,” says Watson. “It’s a risk management tool and a cash management tool. It’s not an ATM.”

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