Before the COVID-19 pandemic, Sally Shea, a passionate 79-year-old grandmother with a passion for art and history, planned to move to a retirement community and simplify her life.
But after being isolated for so long, she changed her mind. She decided she wanted to keep her house but also get the vacation spot she had always dreamed of: an RV on New Hampshire’s Lake Winnipesaukee.
“I went up to visit my daughter and my two grandchildren. She happened to mention the RV next door was for sale,” Shea said. “I didn’t think about it until I got home and was like, ‘Wait a minute, this could be mine.'”
There was a problem: Buying the RV with money from his IRA would cause him to pay a lot more taxes and potentially increase his health insurance premiums.
So she worked with her financial planner and found a solution: a home equity loan, or HELOC.
Today, Shea is busy making memories with her family at their campsite. On a summer Sunday morning, you can find Shea baking waffles for her family. “At 11 o’clock, everyone knows how to come to my house for waffles. I love it,” Shea says.
The problem with cash payment
With the help of her longtime financial planner, Kevin Williams, founder of Full Life Financial Planning, she found a way to fit her dreams of a vacation home into her financial situation.
By fall 2021, Shea had already withdrawn the required minimum distribution from his IRA. To pay for the RV, Shea would have had to withdraw an additional $150,000 from her retirement account.
With such a large purchase, Williams’ first priority was to ensure Shea’s long-term financial security. After that, Williams focused on handling Shea’s taxes and Medicare costs.
“She’s in a relatively low tax bracket, but withdrawing that extra $150,000 from her IRA was going to almost double her tax expenditure,” Williams says.
The third piece of the puzzle was health. Shea has health insurance and the cost of her premiums is based on the previous year’s income. “With this withdrawal, she was going to be put on a much more expensive plan because of this tax year that we were going to create,” Williams says.
So Williams found a better way.
Why she chose a HELOC
The solution was to spread out the payments.
“I knew there was no way to eliminate all those costs, but we could gradually improve it by spreading that $150,000 over several years with a home equity line of credit,” Williams says.
Instead of withdrawing those funds from her retirement account, Shea was able to obtain a home equity line of credit (HELOC) to purchase her RV. Her main house was already paid off, so tapping into her equity offered Shea a bridging loan to spread the tax burden and raise health insurance premiums.
“She ended up saving about $8,000 in total. It wasn’t just a lump sum of money that she saved. We can visualize it as saving three to three and a half years in property taxes and landlord fees on her vacation property,” Williams says. “These are significant savings.”
When tapping into your home’s equity makes sense
As with Shea, tapping into your home’s equity can be a great option as long as you have your ducks in line.
If you are considering borrowing with a HELOC, make sure you know the Why behind what you do. Although a HELOC can work much like a credit card, experts caution against treating it as such. When the borrowing side is so easy, you have to be very careful how you pay it back.
Since Shea was able to withdraw from her IRA again in early 2022, “she’s only borrowed money for three months. With the IRA distribution, she paid off the HELOC and only accumulated than $1,000 in interest,” says Williams.
Although everyone’s situation is different, developing a clear strategy, like Williams did for Shea, is something everyone can learn.
How a HELOC works
When you borrow a HELOC, you use the difference between the value of your home and what you owe on your mortgage as collateral.
Similar to a credit card, a HELOC gives you a revolving line of credit. You only pay interest on the money you actually use. HELOCs typically have variable interest rates, which means your monthly payment is subject to change if interest rates fluctuate.
It should be noted that when Shea took out his HELOC, interest rates were much lower than they are today.
“At this point the rates have gone up and with a HELOC the rates are usually not fixed. If you don’t pay attention to how the interest rate is changing, it can be easy to lose sight of what that cost of ownership is,” says Williams.
Inflation and rising prices can drive up monthly payments for a HELOC. When considering borrowing with a HELOC, make sure you can comfortably afford the payments as rates rise.
How to know if it’s a good idea
The most common uses for a HELOC are home improvement projects or debt consolidation.
“People are taking advantage of the lower HELOC rate to consolidate existing debt and monthly payments,” says Rob Cook, vice president of marketing, digital and analytics for Discover Home Loans.
However, if you’re looking to use a HELOC to consolidate your debt, experts recommend getting to the root of the problem first: your spending habits. If you take out a loan to consolidate your debt without addressing the behaviors that got you there in the first place, you risk finding yourself in debt.
When to be careful
Beyond home improvements and debt consolidation, some homeowners, like Shea, are using their home’s equity in creative ways. At NextAdvisor, we’ve seen homeowners use HELOCs to help pay for cars, college and, in Shea’s case, second homes.
Experts recommend against exploiting the equity in your home just because you can. Make sure you know exactly what you’re going to do with a HELOC before you commit to borrowing.
“Don’t dig the hole until you know what you’re going to do with the dirt,” Williams says. “I always recommend people approach borrowing with a plan in place of how and when it will be repaid.”
For Shea, her summer home was less about financial strategy and more about having fun and spending time with her family.
“The opportunity to buy my first summer seat at age 78 was very exciting, very exciting,” Shea says. “You know, it’s kind of hard to get a real thrill at my age and Kevin made it happen.”
Shea looks forward to more summers on the lake, where she can paint murals and chat with her grandsons over waffles.
“A few years ago, I thought that when I turned 80, I would go to a continuing care facility in my hometown. But now being 80 is more like being 30 to me. So for now, I’m like, ‘No, I’m going camping,’” Shea says.