Do you remember what happened in 2008 to Home Equity Lines of Credit for those who were needing them? That’s right…the banks closed them. There is a much better alternative as a backup source for liquidity and reserve in an emergency.
See below for a reprinting of a recent article by Don Graves:
JPMorgan Chase just announced they’re no longer accepting applications for Home Equity Lines of Credit. No doubt other banks will follow suit with even greater measures!
But this is not new, it happened in 2008 and caught many people by surprise. That’s because traditional Heloc’s have a clause that allows them to be frozen, cancelled or reduced at the banks discretion when certain economic conditions are present.
What does this mean for your retiring or retired clients?
The good news is that for retirees with a reverse mortgage Line of Credit (ReLoc) there are fewer worries since it cannot be arbitrarily cancelled, frozen or reduced. This is especially good news right now! Let’s see how it worked for Bill and Lisa.
Case Study | Retiree’s Looking for Liquidity
Bill and Lisa are 65 and recently retired. They live in a $400,000 home with no mortgage. Their (4) primary retirement concerns are: Having access to funds for unexpected expenses or emergenciesHaving a back up fund to draw from instead of their portfolio in the event of a market correction or an extended bear marketHaving access to money to supplement their lifestyle, but not impacting their taxable or provisional incomeHaving a reserve for a potential long term care eventThey’ve had a traditional Home Equity Line of Credit (HeLOC) for the last 9 years. Now that they are retired and living on a budget, they don’t want to have to make payments if they had to access the HeLOC and they don’t want the bank to restrict access, decrease its availability or cancel their line altogether, as had happened in the past.
Their advisor suggested they look into an equity release strategy that may be better suited for retirees and could address their (4) retirement concerns.A ReLOC!
Understanding the ChartThe graph above gives an illustration of how a ReLOC works.Column A shows the initial Line of Credit amount of $178,000 and it’s projected growth. This gives Bill and Lisa the reserve for expenses they wanted as well as a back up fund to draw from in case of market volatility.
Column B shows how the Line could be converted into a monthly cash disbursements for the life of the loan. This allows them to supplement or increase their income, and because the proceeds come out tax free, there is no impact to their taxable or provisional income.
Column C and D shows the income available for a 5 or 10 year period in any given year. This feature allows them to have a ready reserve of dollars during the Long Term Care Danger Zone (between ages 82 and 88). Notice how much money they could draw monthly for a 5 year period if it were needed.
If you have any questions, Please feel free to contact me.