Maybe: Use Equity as Retirement Income
Some retirees use a HELOC to meet their current income needs in years when their investment returns aren’t sufficient for that purpose, Tilp says.
But again, there’s a risk because eventually the retiree will have to make payments on the HELOC.
“If their investment returns don’t pick up, they’ll need to cut back elsewhere or borrow more against the line of credit, which can start a dangerous downward spiral,” Tilp warns.
Another option is a reverse mortgage, which allows seniors to borrow against home equity without making payments. Instead, the loan is repaid when the senior dies or moves out of the home or the home is sold.
Nope: Use Equity to Pay Off Credit Cards
Paying off car loans, credit cards or other personal debt is another popular use of a home equity loan, HELOC or cash-out refinance.
But the ease with which new debts can be incurred suggests this tactic might not always be wise.
“It may make sense when you run the numbers,” Moore says. “But that doesn’t cure the problem of credit card debt. We want to make sure we’re taking care of what got you into debt in the first place.”
Moore points out that credit card debt is unsecured while a home loan is secured by your home, which explains why the interest rate is so much lower than a typical credit card rate.
“Freeing up unsecured debt for secured debt is typically a bad idea until it’s absolutely necessary,” Moore says.
Maybe: Use Equity for Emergency Fund
A HELOC or home equity loan can be a handy alternative to keeping a large sum of money in a low-rate bank account for emergency savings.
However, one downside of this strategy is that a major life catastrophe can trigger a path to home foreclosure.
“If someone has an emergency and taps the money, but then loses their income and then is in default, they’ve put their home at risk,” Tilp says.
What’s more, Moore suggests, a HELOC as an emergency fund can also be too big a temptation to borrow.
“When (a HELOC) is very easily accessible and the interest rate looks good, it can maybe be too easy,” he says. “By having it, you’re more likely to use it, which is the good and the bad.”
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