A home equity line of credit (HELOC) enables a borrower to draw on a line of credit over a specified number of years at a variable or fixed rate of interest. The lender will specify the maximum amount that you can borrow. The equity in your home is the collateral for a HELOC, just as it is with a home equity loan/second mortgage. Homeowners typically use HELOCs to pay for major recurring expenses such as medical bills and home improvements rather than for daily expenses.
The Figure Home Equity Line (FHEL) is a HELOC that works a bit differently from a traditional HELOC. The borrower receives the entire amount minus the origination fee at closing, which is repaid according to a standard amortization schedule using a fixed rate of interest. The borrower has the ability to make additional draws once a portion of the principal has been repaid. Each of these draws is also at a fixed interest rate, set at the time of each draw.The following list shows five reasons why seniors who own their own homes love HELOCs.
HELOCs are particularly useful for paying medical expenses, although the specific benefits vary according to overall health and marital status. Paying for Senior Care reports that seniors who obtain a HELOC don’t need to live in their home, so a HELOC can be a good option for seniors who need care outside their homes. The decision to move into senior housing often results in a series of moving expenses. A HELOC will allow you to cover any ongoing costs until you can pay for long-term care, perhaps through the sale of your home.
2. Home purchases and repairs
Many people decide to move five to 10 years after retirement, according to The Balance. They want to move closer to grandchildren or to a more favorable climate. Sometimes seniors just want to live near people their own age. Whatever the reason for moving, it usually involves buying a new home before selling the old one. Seniors can use a HELOC to fund the down payment on the new home by borrowing against their equity in the current home. This strategy is often better than liquidating investments, which incurs trading costs and tax liabilities.
People often neglect to consider the cost of home repairs when planning their retirement, but such expenses can kill a budget. A house will certainly require major repairs after 20 to 30 years, which can occur without warning. Drawing on a HELOC provides an alternative to liquidating assets such as investments or retirement accounts. Borrowing funds via a HELOC allows you to repay the loan gradually without disrupting your portfolio.
3. Auto purchases
Buying a car every 10 years or so is another expense that people often forget about when planning their retirement budget. This expense can incur a tax liability if most of your money is in tax-deferred accounts like IRAs and 401(k)s, as any amount you withdraw from these accounts will be considered taxable income for that calendar year.
This aspect of retirement accounts becomes even more of a disadvantage when a large withdrawal like a vehicle purchase would push you into a higher tax bracket. Assume for this example that your normal withdrawals from your retirement account are taxed at a rate of 15%, but that the additional withdrawal for a car purchase would push you into the 25% bracket. In this case, it could be better to use a HELOC to fund the purchase. You could then repay the loan gradually, avoiding the higher taxes that would be caused by making a large withdrawal from a retirement account in a single year.
4. Alternative source of cash
Managing your money during retirement is quite different from managing your affairs while working. When you’re earning income, you can recover from a downturn in the market by temporarily increasing your investments to rebuild your portfolio. However, a down market has a more adverse impact once you retire and begin making regular withdrawals from your portfolio, a condition commonly known as sequence risk.
A HELOC can allow you to lengthen the life expectancy of your income stream by reducing your portfolio withdrawals during down years, maybe even eliminating the need for them altogether. In this case, you’re using a HELOC as an alternative source of cash, which you can repay from your portfolio after it recovers.
5. Helping the kids
Adult children often need temporary financial assistance that they eventually will be able to repay. Situations in which adult children might need a temporary cash boost from their parents include starting a business, buying a home and going through a period of unemployment. Should one of your children call on you to assist in this way, you might want to consider using a HELOC if liquidating assets will incur a tax penalty. If you think you might require access to a source of funds unexpectedly, you should consider obtaining a HELOC in advance of the need.
If you plan to use Figure’s HELOC, you should know that it’s a bit different from a traditional HELOC. Firstly, our entire application process is online, so you can complete an application in as little as five minutes2. Once you’ve been approved, funding can occur in as few as five days2. Secondly, our HELOC offers a fixed interest rate† and lump sum payout when you are approved. You can get started using your money right away.
Applying for a HELOC during retirement can allow you to pay for many major expenses. You need to have at least some equity in your home to consider this option. Even if you still have a mortgage, a HELOC can work for you so long as you build the payments into your retirement budget. It’s important to make regular payments on a HELOC to ensure that you will have access to it again when you need it.