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September 28, 2005 at 08:00 PM
As the Fed reacts to the threat of inflation by ratcheting up the prime rate, providers of home equity lines of credit also are reacting in an effort to make those credit lines more attractive to consumers.
But financial planners contacted by National Underwriter say that in general they remain cautious about recommending that a boomer, and particularly a boomer nearing retirement, tap into a home’s equity with a credit line.
The rates of home equity lines of credit track the prime rate. So, boomers who borrow will notice it even if they only make interest payments at first. Later, when principal and interest need to be repaid, they may feel it even more if rates are readjusted upwards.
Michael C. Valdez, a certified financial planner with Triangulum Financial Partners, Tampa, Fla., says he has “some trepidation” with products that have an interest-only component.
Valdez says he does not see these in his practice. He cautions boomers that as a long-term planning tool, there are many unknowns that reflect both the real estate market and their own futures, so care needs to be taken. While it can be a financial planning tool, he notes that “it can be a dangerous play.”
As Marlis Gilbert, a certified financial planner with Gilbert & Cook, Des Moines, Iowa, sees it, “It could be a good idea for someone who is living on the edge. I’m trying to make it so that they are not living on the edge.”
And, as Shannon Wegner, a certified financial planner with Wegner Asset Management, Madison, Wis., explains, since many of his clients are closer to retirement, they have either paid off mortgages or are in the process of paying them off. And, they also would be in the process of paying down lines of credit, he adds.
There are instances when a home equity line of credit can be useful, according to Michael A. Kirsh, a certified financial planner with Kirsh Financial Services, New York.
If it is a choice between a home equity line and credit card debt, the home equity line would at least give you a deduction, he says. In one case, a client wanted to liquidate an IRA to pay for a daughter’s wedding. Instead, he convinced him to use a home equity line of credit and make periodic payments from the IRA so that at least the IRA would remain in place and not be eliminated totally.
But he cautions against excessive debt. Debt without a deduction can be a “fool’s errand.” Planners today are in conflict with Madison Avenue, he says, with the need to save being pitted against the need to consume.
Nan Sabel, a certified financial planner with the Women’s Financial Network, Bedford, Mass., says that in certain instances, a home equity line can be advantageous.
For instance, one couple she works with has a home that is paid off and has $800,000 in equity. Rather than take out a loan for two cars that would not be deductible, she recommended a home equity line.
But for those using a home equity line for a car or other short-term asset, Sabel says the boomer should not be paying off the loan over 10 years or 20 years. Rather, an effort should be made to pay it off more quickly, she explains.
Home equity lines usually have no closing costs associated with them unless the property is in a trust, she says. And, even then, at least in Massachusetts, the fee is only about $150, Sabel continues. The transaction usually can be completed in about 2 weeks, she adds.
