I am in a dilemma whether or not to refinance my mortgage, get a home equity line of credit (HELOC) or a home equity loan. The reason for the extra money is for some home repairs and improvements to the tune of $50,000. Currently, I have no debt, my mortgage with taxes is $1,400. I owe $110,000 on the home, which is worth $400,000 to $425,000. I'm retired. I have a small monthly retirement from my employer and am currently on unemployment. I am getting ready to collect Social Security next year. I have a healthy 401(k) with about $800,000 and liquid assets of $80,000. Can you advise which is the best way for me to go?
There's a big caveat here: Home equity credit lines carry variable interest rates typically with no cap, and that's a concern given that you are on a fixed income. However, rates are expected to remain low for at least two years and likely beyond. In the event interest rates suddenly spiked, would you be comfortable using your cash on hand to pay down the line of credit as a Plan B?
The key is to have a written plan from the get-go to pay back the principle and interest on a monthly basis, earmarking, say, $400 to $500 each month toward paying it down. Look carefully at the bite that expense will take out of your budget. Your home is the collateral for this loan, and you don't want to put yourself in a precarious position. You may even want to consider waiting a year until you're actually collecting Social Security and have a better handle on your monthly income.
I'm also assuming you intend to stay in the home long-term rather than fixing up the place to sell, because with the depressed housing market, you may not recoup the cost of those upgrades. Good luck!
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