Over the past few years, a lot of people have seen their lives disrupted. Many may have financial needs they hadn’t planned for. On top of that, the cost of borrowing is on the rise. So what are some smart ways for clients to access emergency cash without paying the 11% average interest rate on personal bank loans or 20% that credit cards now demand?
Explore Your Options
“The first question is, how much cash is needed and how long is the cash needed?” says Dustin Gale, a senior wealth advisor at Kayne Anderson Rudnick in Los Angeles.
If the need is immediate and short-term, and the client has an investment account, Gale suggests a securities-backed line of credit. “A margin line or portfolio-secured line of credit against a taxable account may provide the quickest and easiest solution at competitive rates,” he said.
These credit lines generally let you borrow up to 95% of the value of the assets. You must make monthly payments, though, and if the value of the collateral portfolio happens to fall below the outstanding balance, you may be required to pay back the full balance immediately.
“As always, make sure to understand the details and risks, and be sure to shop around,” said Gale.
Tapping Home Equity
Another option is borrowing against your home equity. This may take several forms. There are straightforward home equity loans, home equity lines of credit (HELOC), and reverse mortgages.
“A home equity loan is basically another mortgage,” says Chris Briscoe, vice president and wealth advisor at Girard, a Univest Wealth division, in King of Prussia, Pa. “The amount you’re allowed to borrow depends on the value of your home and how much you already owe on it.” Payments are at a fixed interest rate for the term of the loan, frequently lower than a consumer loan since home equity is good collateral. But there are closing costs, and if the cash is needed in a hurry this may not be the answer.
A HELOC, on the other hand, allows you to borrow on an ongoing basis, like a credit card. But the interest rate is variable—which means, in this environment, your payments are likely to rise.
The third option, a reverse mortgage, is primarily for “those in the decumulation stage of their retirement planning,” said Jason Miller, a partner at Crewe Advisors in Scottsdale, Ariz. You don’t have to make regular payments, but the entire amount is due when you move out, sell the home, or die.
Federal regulations have made reverse mortgages safer than they used to be. For instance, the loan amount can’t exceed the home’s market value. If the home’s value dips too low, the lender’s insurance will cover the difference, so the borrowers (or their heirs) aren’t responsible for it.