Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Should I open a HELOC?” For those of you unfamiliar with this term, a HELOC is a Home Equity Line of Credit. I’m generally a fan of HELOCs for tax and cost reasons, but let’s cover the basics first.
Let’s say you have a home worth $800,000 and a mortgage worth $400,000. You obviously have a loan-to-value of 50% with $400,000 of equity in your home. With a traditional fixed-rate mortgage, your principal and interest payments are the same every month for the life of the loan and you can’t take more equity out of your home through that mortgage unless you refinance. However, with a HELOC, you may be able to quickly access the equity in your home for various reasons.
Generally, a bank or credit union will let you borrow up to 80-90% of the value of your home, even if you have a mortgage. Using our home example, 90% of $800,000 is $720,000. Since a mortgage of $400,000 is already in place, that means a bank might approve a HELOC loan up to $320,000. So why would someone do this? What I like about HELOCs are their flexibility. Once open, you can quickly borrow on the HELOC to update your home or make large purchases. You can make minimum payments on the loan or you can pay it back right away lump-sum. In a low-interest rate environment, the cost of a HELOC is attractive too. Sometimes our clients call us in November and need lump-sums of cash for various reasons. If their investments are at a large gain, we might have to realize those taxable gains and pay Uncle Sam. However, using the HELOC instead may mean we can defer those taxable gains into the next tax year or beyond. This is one example of how they can be used for tax planning.
The idea of relying on debt to make financial decisions may seem counter to someone’s goals, but if you remove the emotions and look at it as a business decision, you can see how HELOCs may play an important role in complex financial planning. Once established, a HELOC is also convenient to use since you can generally access the loan within minutes right from your smart phone. A HELOC may not be for everyone, but it’s a unique planning tool that should be considered.
If you have a question about this topic or have a question for next month’s video, please send it to dtroyer@monetagroup.com. Thanks for watching and we’ll see you next month.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.
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