HELOC (Home Equity Line of Credit) - How to Use
Your clients may want to consider a Home Equity Line of Credit (HELOC) to fund their retirement or finance other expenses. This article uses a case study to illustrate using a HELOC to provide $6,000 annually in retirement.
In this article:
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Creating the HELOC on the Debts page
Create a new loan under Scenario Setup -> Debts. For a new HELOC, enter a Balance of $0, enter the Interest Rate, and choose Interest Only from the Repayment Options. By linking the house to this loan under the Real Asset column, this loan will be automatically paid off if it is sold in the projections.
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Borrowing money on the Planning page
On the Planning page, there are columns for the amounts Owing and Paid for the HELOC (Debt). To allow for editing, make sure the Debts section is expanded with the arrow icon in the header pointing left. For joint debts, follow the steps below for each spouse.
Enter the amount the client borrows each year as a negative value under the Paid column. You can use the copy-down feature for easier data entry.
Run the scenario.
The amount under the Owing column increases as the money is borrowed for the HELOC. Snap assumes that the money is borrowed at the beginning of the year (the -$6,000), while the amount Owing is the balance at the end of the year including interest.
In this case, all interest is capitalized going forward. In our example, each year the client borrows a net new amount of $6K. One way to think about this is that the client has borrowed $6,307 and then paid $307 in interest. So their net spending of overall cash flow from the debt is $6K, but their total amount owing at the end of the year is $6,307. Then in the second year, they borrow $6,630 and pay $630 in interest.
The idea of paying interest on a HELOC is a bit of a formality since you can just borrow the money, put it into the chequing account and then pay the interest. So what we're interested in from a modelling perspective is how much of the money coming from the HELOC is available for spending purposes, and that's what the Paid column represents.
Note: The Line of Credit is Unlimited
You need to monitor the amount Owing for the HELOC. There is no constraint to limit the total loan to a certain percentage of the home's value.
To pay off the debt follow the steps outlined here: Debt Repayment Options.