Denver Home Living Huettner Capital Winter 2017/18 | Page 33

WHAT ARE THE LOAN OPTIONS TO UTI-
LIZE THE EQUITY IN A HOME?
Other than selling their homes, people have three options to
use the equity in their homes. A reverse mortgage, a cash-
out refinance with a traditional loan, and a Home Equity
Line of Credit (HELOC). You can also use a combination
of a cash-out and HELOC. Each option has its own
benefits and drawbacks, and each client situation has its
own needs, so it is important to understand them all.
1. Reverse Mortgage
iii. Obtain a HELOC for additional expenses
beyond the initial period and surprises.
iv. Avoid high rates and fees as well as the
restrictions of reverse mortgages.
b. Cons – Monthly payments and paying interest
on some funds prior to needing the money.
SO, WHEN IS EACH OPTION MOST APPROPRIATE?
In most cases:
• a reverse mortgage is best when you do not have
any other options. What I mean is when you do
not have other savings, investments, income, or
family members for help or to leave an estate to.
a. Pros – No monthly payments, no loan qualification,
and the ability to take equity in a lump sum,
as an annuity, or use as a line of credit.
b. Cons – High upfront costs, higher interest rates, sale/
repayment requirements, and limited access to equity.
• A cash-out loan is best when you will be in the
house for less than ten years, have other sources of
income, and have a chunk of debt to consolidate.
2. Cash-out Refinance
• a HELOC is best when you don’t have any other
debt, do not plan to be in the home for more than
a. Pros – Low fixed rate and fees.
What are your clients’ main objectives in utilizing the equity in their homes?
More often than not, clients want to accomplish the same five goals while
avoiding the same five pitfalls. I call it the Home Equity 5&5:
5 GOALS TO ACCOMPLISH
1. Stay in their home 5 PITFALLS TO AVOID
1. High loan fees
2. Consolidate debt 2. Adjustable interest rates
3. Reduce taxes 3. Taking a large lump sum
4. Pay for medical care 4. Spending all of their money
5. Have cash for unplanned expenses 5. Not having an estate for their heirs
b. Cons – Monthly payments and equity must
be taken in a single lump sum at closing.
3. HELOC
a. Pros – Interest-only payments, the ability
to draw money as needed, and access to
most of the equity in the home.
b. Cons – High adjustable interest rate, monthly
payments, and limited draw period.
4. Cash-out Refinance and HELOC – Cash-
out refinance to consolidate all current debt
and an additional fixed amount for expenses
with a HELOC for additional funds later.
a. Pros:
i. Consolidate all current debt to a single,
fixed-rate loan with lowest rate and fees.
ii. Liquidate an initial amount of equity to cover
expenses for an initial period with a low fixed rate.
ten years, and have other sources of income.
The hybrid option— cash-out refinance and HELOC—is
actually the best option for many people because it offers
the most flexibility with respect to costs and risk. Taking
out an initial amount of equity to cover two to five years
of expenses at a low fixed rate and having a HELOC
for unplanned and future expenses provides a blend of
low cost and risk with flexibility. Combined with other
assets like life insurance and retirement assets, this plan
allows people to cover five to ten years of anticipated
expenses at a fraction of the cost of a reverse mortgage.
ANY FINAL TIPS?
Be sure to take the time to find experienced professionals who
are true experts with several years of experience. You simply
cannot risk your life savings to someone who is not capable of
providing the service you need. One common mistake people
repeatedly make is to use a friend or relative because they like
and trust them, regardless of their ability and experience.
33