USING A LINE OF CREDIT TO STRETCH YOUR CASH IN RETIREMENT.

In many estates the home is the largest asset or one of the largest assets. A line of credit secured by a retiree's home will provide the flexibilty to access money when its needed. For instance, at age 62 you can apply for and receive monthly social security payments, but the amount oif those payments will be 75% greater if you wait until age 70 to apply for social security benefits. How do you live from age 62 to 70? One way is to access your line of credit and pay it back, if you choose to, with part of the social security payments received after age 70.

Many people sell a portion of their investments each year to pay their living expenses. The 5% rule used by many financial planners reuires you to sell 5% of your investments each year to pay your living expenses. The problem is that your investments will only last so long when they are sold to live on. If they are sold when the stock market is depressed, you will lose substantial amounts when you sell, dissipating your investments even faster. If you have a line of credit you can draw on the line for living expenses instead of selling stock, at a huge loss, when the market is down, and pay back the line of credit, if you choose to, by selling the stock later when the market comes back.

Some people are interested in increasing the size of their estate. If they are in good health they may draw on the line of credit to putrchase life insurance that may be two or three times the amount of their original estate. The best part is that most of the estate can be funded with cash upon their death intead of having to sell stock, the house or other assets in the estate before the estate has liquidity. As you know, the house, stock and other assets can suffer dramatic declines in value, while the life insurance will remain at a constant value and can even be structured with increasing value.

The line of credit is usually a good idea, but there are differences in the available lines of credit. Most bank lines of credit require good credit to get. Although they may require interest only payments for a period of time, eventually the line of credit must be paid back with larger principal and interest payments over a term of years. If the payments aren't made the bank will foreclose on your property. The bank line of credit is recourse, meaning you or your estate will always be responsible for paying back the line of credit, even if the value of your home drops in value and the sale of your home does not provide enough money to payoff the line of credit.

There is also a Home Equity Conversion Mortgage (HECM) Line of Credit, sometimes called a reverse mortgage, which is much more flexible than a bank line of credit. These lines of credit are FHA insured and the line of credit requires no monthly payments of principal or interest during the life of the loan. You can pay the principal or/and the interest if you choose because there is no prepayment penalty, but if you choose not to, the loan will not be in default and will not go into foreclosure like the bank line of credit would. You can even use a HECM to pay off your existing mortgage, if you have one, and not have to pay any monthly payments anymore.

The HECM line of credit is non-recourse meaning that you and your estate are not personally liable to pay the loan back. If the home value falls below the loan balance you and your estate will not have to pay the deficit as you and your estate would if that happened with a bank line of credit. In fact, if the home value fell below the loan balance, your estate may retain the home by paying 95% of the value of the home and the rest of the loan is forgiven! The line of credit increases each year by an amount roughly equal to the interest rate on the loan, around, 5%, because you get a year older. This increased line of credit will be funded at your request even if the loan balance exceeds the value of the house!

The HECM is not due until the last borrower dies, No borrower lives in the home or you sell the property. If you sell the property the equity is yours or your estates, if there is no equity or there is a negative equity you or your estate don't have to pay the loan deficit as you would with a bank line of credit. As with a bank line of credit you have to pay your real estate taxes, insurance and maintain your home. If you can qualify for a HECM, it is far superior to a bank line of credit, but any line of credit will enhance your estate plan.