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Your Money, Your Independence Establish Access When Things Are Good, Not When Times Turn Bad

Glenn Brown

Planning for the unexpected when things are good is a necessary evil.   

This is true for electing work benefits, insurance, estate planning and access to equity.

When engaging in discovery with new clients, I often encounter misconceptions or bias against Home Equity Line of Credit (HELOC). 

Their mindset is to seek one only when there is a large home repair or renovation project. True, it can be used for this purpose and the interest could be tax-deductible. But there’s other benefits to consider in using access to the equity you’ve built as a tool. 

Let’s take a step back, make we sure understand the tool. 

What’s a HELOC? - A second mortgage that allows you to borrow money using the equity in your home as collateral - a secured line of credit. There is an underwriting approval process with a hard credit pull and home appraisal, which determine terms including duration (usually 10-15 years), variable rate benchmark (-/+ Prime Rate) and credit limit. 

Most banks/credit unions allow 70% or 80% Loan-To-Value (LTV) minus mortgage balance. For example, your house now appraises for $800K. At 70% LTV is $560K less mortgage balance of $400K means potential $160K HELOC. At 80% LTV, $640K - $400K = $240K HELOC. 

Upon closing, you’re provided a checking account to move money into and out of the HELOC as you please. If you do borrow, you will only owe interest for a monthly payment. However, keep the balance at $0, then no interest or fees. 

And that’s the strategy - keep the balance at $0 for the “what ifs” in life. 

Take a dual-income household with slightly positive cash flow each month. When bonuses or RSUs vest, they build savings, pay cash for big expenditures, take vacations, etc. They could be approved for ~$150K HELOC but choose not to plan and apply. 

Then the following happens:

Job-Loss - Instead of coming from a position of strength, you’re now at the mercy of a lender - good luck on those terms, even if approved. 

Bank Balance Sheets Gone Mad - Fall 2008 saw banks stop issuing new HELOCs almost 2 years. Some tried to reduce, even close HELOCs, but regulators stepped as it is secured line of credit. As long as the collateral (house) and borrower uphold terms of agreement, the banks couldn’t change terms - even if you lost your job. Same is not true for credit cards.

World Gone Mad - Remember when we’d shut down for 2 weeks to end a pandemic but instead laid off 38 million by end of April 2020? Banks stopped issuing new HELOCs and slowed new mortgages until October. And those with high limit HELOCs at $0 balance became cash buyers of vacation homes from cash-seeking sellers. More opportunistic planning occurred using cash-out refi in 2021 on new property to lock in a low, fixed rate.  

Economic Downturn - Banks reduce lending in anticipation of economic slowdowns. Regardless of your opinion on recession, we can all agree banks need deposits in order to underwrite new loans/lines. What’s been a recent problem banks are having to maintain? Deposits. Declining deposits equals declining new lending applications. 

There are more strategies to consider for HELOCs. Like using as an emergency savings proxy to reduce opportunity costs or delay/spread out taxation from selling investments over calendar years to meet unexpected cash needs. 

Talk to your Certified Financial Planner to learn more. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.

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