Why near-retirees should get HELOC for only amount they really need

When we apply for Home Equity Line Of Credit (HELOC), we normally try to get maximum possible line. However, near-retirees should get HELOC for only amount they realistically need. It's good to keep debt to income (DTI) ratio low for them.

As they retire and wish to take another loan (say zero percent auto loan financing deal), it might get tricky to qualify as retiree (with limited income).

For the same reason, as near-retiree, it's better to go for 30 years mortgage refinancing. It would keep DTI ratio low. Also this would make it much easier to qualify for another HELOC in future as and when current HELOC's draw period is about to end.

BTW, while calculating new loan DTI ratio, prospective lenders assume maximum utilization of line, even though our current HELOC loan balance might be just zero.

For example, I have $80K HELOC line with 3% interest. When I re-financed my mortgage few months back, I had no current loan balance on my HELOC. However, I saw $200 as monthly debt liability figure for this HELOC in liabilities section of my mortgage details (as pulled from credit report).

Note that HELOC monthly installment typically does not include principal repayment. It's only interest what we need to keep paying on monthly basis during draw period. Principal needs to be paid during repayment period. Accordingly it seems this $200 monthly debt figure above is derived by using 3% APR charge on $80K max line utilization ( (80000 × 3%) / 12 = 200).

Bottom line is to try to keep DTI ratio low enough so that we leave some room for future debt, especially ones with very favorable rate. See How I invested cash out money after refinancing our fully paid cars for one such favorable rate you want to leverage.

Comments

Post a Comment

Popular posts from this blog

How much one needs to save in retirement portfolio to retire comfortably in early sixties age

Wondering as how much one needs to save in retirement portfolio to retire comfortably starting with one's early sixties (say at 62 age) for next 25-30 years of joint longevity and be lucky enough to survive  extreme uncertain period such as 2000-2010 lost decade (with two major crashes resulting in virtually zero compounding )?  Needless to say, it all depends on household's ongoing expenses during retirement.  If one retires at 62, one can collect reduced social security pension (say 75% of full 67 age benefit). Non-working spouse can also collect half amount as spousal benefit at 62. Combined household reduced  benefit could be around 25K to 30K a year for professional workers like us. If household's annual expenses, including medicare/affordable-care health insurance co-premiums/copays (typically 5-6K annually for retired household for routine care) are in 60K range, then perhaps one needs additional income of 30K to 35K beyond social security pension. If one has retir
Read more

SPDR® S&P Semiconductor ETF (XSD) - Excellent small cap semiconductor index fund

Recently I came across another *semiconductor* focused low cost index ETF which seems quite promising index. It's called SPDR S&P Semiconductor ETF ( *XSD*). Unlike iShares Semiconductor ETF SOXX ( https://financial-well-being.blogspot.com/2022/01/iShares-Semiconductor-ETF-SOXX-Passive-Semiconductor-technology-index.html ), which focuses primarily in *large* cap, XSD focuses into *small and mid* cap semiconductor companies of S&P Total index. It's *equal weighted* index and that's why it's average capitalization is in mid and small cap.Overall it's comparable or *even better* than SOXX. For example... - It's PE is comparable to that of SOXX - Dividend yield plus earnings growth of 16% as compared to lower 13% for SOXX - It's 3/5 year returns of 23/22% is 20% better than that of SOXX's 19/18%. It tracks *semiconductor small cap* sector which has been one of the top performer in technology sector with close to *20% annual return* for last 5, 10 an
Read more

Why bonds must be always part of our overall portfolio mix

If one's retirement horizon is quite far away, they need not invest any retirement money in bonds. Bond's long term REAL (after inflation) returns are too low (just 2%) as compared to that of stocks (which is 7%). Note that above suggestion of not keeping any retirement savings in bonds for younger (below mid fifties) workers comes with a caveat. It's only meant for savvy  investors (with higher risk tolerance ) who are able to effectively manage pain of loss during stock market downturns and stay course  without losing any sleep. With 100% stock portfolio, pain of loss is expected to be most severe . So, unless you believe in long term potential of stocks and are willing to exercise patient, don't try 100% stock portfolio. Rather, like typical  retirement saver, stay with target date retirement funds (which typically has decent bond allocation) so that short term losses during crashes is emotionally  better manageable for your lower risk tolerance. Near retiree (tho
Read more