To Using Home Equity
Financial discipline is the best litmus test baby boomers can use to measure whether a home equity loan is good for them, financial planners say. And, even then, planners have diverse views on whether tapping into the value of a home is a good idea.
Some planners just have a visceral wariness about using a home equity loan.
A home should be “a solid place, a shelter,” says Don Claussen, a financial planner with Financial Pathfinders, LLC, Hendersonville, Tenn.
Claussen says he occasionally receives inquiries from clients but is “philosophically opposed” to the idea. “I hate to see people put their home on the line for any investment that might turn sour.”
But, he notes, there are clients who feel confident they can handle these loans and “it is hard to keep your personal feelings out of the issue because there may not be a good reason you can offer to not go ahead with it.”
For instance, he cites the case of a neighbor who used a home equity loan to buy an investment property in Australia. The purchase worked because the neighbor really wanted the property, and the Australian dollar appreciated against the dollar after the signing, Claussen says.
But, he adds, despite this success, “any time you bet against currency values,” there is another risk in addition to the usual risk associated with a home equity loan.
In general, “my perspective is that any kind of debt is bad,” says George Middleton, a financial advisor with Limoges Investment Management PC, Vancouver, Wash.
So, he says, the preferable option for buying a car or funding an education is to start saving for it.
But, Middleton adds, on occasion, he receives inquiries from clients who usually have paid off or are close to paying off their homes. They need access to cash but do not want to take out a new mortgage, he says. “It is temporary and not a 30-year thing.”
A home equity loan can be easy with no closing costs or points, he says.
Just recently, Middleton says, some clients have used home equity loans to add a bedroom and bath to their home so the children will have a place to stay when they visit with the grandkids, and to pay the down payment on a house for a child.
Other planners say that, when used innovatively, home equity loans can be a tremendous financial tool.
Steven Merkel, a financial planner with Investor Solutions, Coconut Grove, Fla., cites how the use of “piggybacking” a home equity loan enabled him to avoid property mortgage insurance when he recently bought a home.
Merkel explains how home equity worked in his favor. Typically, if you put down less than 20% on a home you have to take out PMI to protect the lending institution if its loan goes bad.