Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How Early Retirees Tap Home Equity Without Selling
Transcript
- Lucas: So we've talked a lot about different ways to fund early retirement — Roth ladders, dividend income, TIPS ladders. But there's one big asset that most retirees don't think about using, and it's sitting right under their roof. Luna: You're talking about the house, right? Using home equity without selling it. Lucas: Exactly. A home equity line of credit, or HELOC, is a tool that lets you borrow against the value of your home, and for someone in early retirement, it can be a flexible bridge when your investments are down. Let's say the market drops 30 percent — you don't want to sell stocks at the bottom. A HELOC gives you cash to live on while you wait for the recovery. Luna: So it's like a buffer against sequence risk. But isn't it risky to borrow when the market is already falling? Lucas: It is, but if you have a plan, it can actually protect your portfolio. Let's walk through a real example. Imagine you retired at 55 with a million-dollar portfolio and a paid-off house worth $600,000. The market drops 25 percent, and your portfolio is now $750,000. You need $40,000 a year to live. If you sell, you're locking in losses. With a HELOC, you can draw $40,000 at, say, 7 percent, and let your stocks recover. Luna: But you're paying interest on that. How do you justify the cost? Lucas: Good question. The math works if the market recovers quickly. Historically, after a 25 percent drop, the S&P 500 has recovered within two to three years. If you're paying seven percent on a forty-thousand-dollar draw for two years, that's about five thousand dollars in interest. But if selling would have meant missing out on a thirty percent rebound, that's a hundred and fifty thousand dollars on a million-dollar portfolio. So you're paying five thousand to avoid a hundred and fifty thousand in opportunity cost. Luna: That makes sense when you put it that way. But what about the interest rate itself? HELOCs are variable, right? Lucas: They are, and that's the biggest risk. As of August 2026, the average HELOC rate is around eight percent, but it can go up. If the Fed hikes rates, your payment could increase. So you need to stress-test that. If you can't handle a two percent increase in your draw rate, maybe HELOC isn't for you. Luna: So it's kind of like you're borrowing at a variable cost to avoid a potential big loss. How do you qualify for a HELOC when you're retired and don't have a traditional paycheck? Lucas: That's the catch. Banks want to see income, but they'll count investment income, dividends, and even your portfolio's assets as a form of income. Some lenders will underwrite based on your asset base, not just your salary. You might need to show a certain amount in liquid assets — often two to three times the loan amount. So it's doable, but you have to shop around. Luna: And the line of credit is secured by your home, so if you can't pay it back, you could lose the house. That's a serious risk. Lucas: Absolutely. That's why you don't use a HELOC for anything other than essentials. It's not for a new car or a vacation. You draw only what you need to cover living expenses when the market is down, and you pay it back as soon as you can. The discipline is key. Luna: Now, you mentioned a specific example earlier. How long would you typically carry a HELOC balance before paying it off? Lucas: Ideally, you'd draw for a year or two, then pay it off when you either sell some investments at a higher price or when your dividends and other income pick up. Some people use it as a short-term bridge, not a long-term loan. You don't want to carry it for ten years because the interest compounds. Luna: So it's a tactical tool, not a lifestyle change. That makes sense. Let's talk about the costs, though. Are there fees to set up a HELOC, or are they usually no-cost at origination? Lucas: It varies. Some banks offer no-cost HELOCs, but they might have an annual fee or require you to keep the line open for a minimum period. Others have closing costs, maybe a few hundred to a couple thousand dollars. You have to read the fine print. And there's often a requirement to draw a minimum amount in the first year, which can be a trap if you don't need the money. Luna: So you should really only get one if you have a planned use for it. Is that what you're saying? Lucas: Precisely. Don't set it up just in case. Set it up when you have a specific scenario in mind, like a potential market downturn, and you're prepared to act on it. Otherwise, you're paying fees for nothing. Luna: Now, what about the draw period? HELOCs typically have a draw period of ten years, then a repayment period. How does that work for a retiree? Lucas: Right, the typical HELOC has a ten-year draw period where you can take money out, and then a twenty-year repayment period where you can't draw anymore and you start paying down the principal. So if you're planning to use it as a bridge for a couple of years, you have plenty of time. But if you carry it into the repayment period, your payments could jump dramatically. So you want to have a plan to pay it off before then. Luna: That makes sense. And the interest is tax-deductible only if you use it to improve your home, not for living expenses. So that's another thing to keep in mind. Lucas: Good point. Since 2018, you can only deduct HELOC interest if it's used for home improvements. So for retirement spending, it's not deductible. That raises the effective cost, so you need to factor that into your comparison against selling investments. Luna: So when does it make more sense to just sell investments instead of using a HELOC? Lucas: If you have investments in a taxable account with a low cost basis, selling might trigger a big capital gains tax. In that case, a HELOC could be smarter. Also, if the market is down, but you have cash reserves, you'd use those first. The HELOC is really for after you've exhausted your cash and bonds, but you don't want to sell stocks at a loss. Luna: So it's like a last-resort bridge before selling. But what about the risk that the bank cancels your HELOC? That happened to a lot of people in 2008. Lucas: It did. Banks can freeze or reduce your line if your home's value drops or if they see you as a credit risk. So you can't rely on it as a guaranteed backup. You need to have a plan B. That's why some people set up a HELOC before they retire, while they still have a job, to lock in the line. But even then, it can be frozen. Luna: So the key is to have multiple tools in your toolbox. A HELOC is just one piece. Lucas: Exactly. And that's what we're exploring in this series. It's about having options so you don't have to make a desperate move at the worst time. Luna: This has been really helpful. I know you've talked about a lot of strategies, but HELOC is one I hadn't considered. Has our conversation helped you think about your own strategy? If so, we'd love to hear from you. Lucas: And if you're getting value from these episodes, the best way to support us is to buy me a coffee — literally. Buy me a coffee dot com slash fexingo. It's a simple way to keep this show going without ads. No pressure, just if you can. Luna: Every little bit helps, and we appreciate the support. Now, back to the strategy — what are some common mistakes people make when using a HELOC in retirement? Lucas: The biggest one is treating it like an ATM. You see a balance available and you think it's free money. You have to set a rule for yourself: only draw when your portfolio is down a certain amount, say twenty percent from its high, and only for essential living expenses. Write it down and stick to it. Luna: So it's a discipline thing. What about paying it off? Should you have a specific plan for that? Lucas: Yes. You should know exactly how you're going to pay it back — whether that's from future dividends, selling a rental property, or when the market recovers enough that selling makes sense. If you don't have a plan, you could end up with a balloon payment at the end of the draw period that you can't afford. Luna: That sounds like a recipe for stress. So you'd say avoid it unless you're very disciplined. Lucas: I'd say it's a powerful tool for the right person, but it's not for everyone. If you're not comfortable with borrowing or you can't sleep at night owing money, then it's better to just sell investments and accept the sequence risk. There's no shame in that. The goal is to find a plan you can stick with. Luna: That's a good note to end on. Thanks, Lucas. That was really insightful. Lucas: Thanks, Luna. And thanks to all our listeners. We'll be back with another strategy next time.