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Home Equity LOC - vs other options???

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bildad1
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Home Equity LOC - vs other options???  Reply with quote  

Hello all,

I am a widower who is living in our home that is fully paid off. It is currently valued at approximately $122,000.

My son is in-between careers, about 2 months ago he was let go. He hit the ground running and got his insurance license. However as we all know this business takes a couple of years to get running.

I want to be able to help him. He doesn't have a lot of credit to stand on. I have several options but not sure which may be best. I have EXCELLENT credit.

I am figuring to be able to help him for about a year to "bridge" the path to his new job. Somewhere in the neighborhood of about $15,000.

My question is, since the house is paid off, would I be better just going to my banker and getting a loan in my name, or would a home equity line of credit be better? Or something else?

I want to help him but I want to make the right decision. Any advice?
Post Sun Aug 16, 2015 10:23 pm
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littleroc02us
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The question you should be asking yourself is "Can I afford to give him 15k without taking a loan or if I do borrow against my home will my retirement be sacrificed?" It's admirable to help someone in need so long as they are making good decisons, but if it damages your ability to retire with enough savings, then it isn't a wise move on your part.
Is this loan your thinking about taking a gift or a loan to be paid back?

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Aug 17, 2015 5:06 pm
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bildad1
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quote:
Originally posted by littleroc02us
The question you should be asking yourself is "Can I afford to give him 15k without taking a loan or if I do borrow against my home will my retirement be sacrificed?" It's admirable to help someone in need so long as they are making good decisons, but if it damages your ability to retire with enough savings, then it isn't a wise move on your part.
Is this loan your thinking about taking a gift or a loan to be paid back?


I have no doubt he will pay me back, although not right away of course. And I am not fearing about retirement, as I have other income. Was just wanting opinions on the different options.
Post Mon Aug 17, 2015 5:43 pm
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littleroc02us
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The only reason I ask is because although your son may have every intention of paying you back, this is actually a very common problem amongst family members, where an un forseen event happens in life and the person is unable to pay you back and then things become weird. My advice would be, if you plan on giving the 15k, please know in the back of your mind whether or not you would be willing to forgive the debt and call it a gift should he not pay you back.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Mon Aug 17, 2015 8:12 pm
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oldguy
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quote:
I have no doubt he will pay me back, although not right away of course. And I am not fearing about retirement, as I have other income. Was just wanting opinions on the different options.


As a person quite a bit older than you, and having witnessed your situation many times - let me say that he fully INTENDS to pay you back, would never stiff his Dad. And you intend to accept the repayment when it's offered (if ever). But life happens, he'll have trouble paying - and you'll want to keep helping of course. With ALL family loans, no one says "this will fail" - it is always "but that won't happen to us, we get along so well". And in a few years the conversation turns to "you'll inherit it anyway, you may as well hold onto it".

Anyway - I would break the loan into two $7500 chunks, this yr and 2016. That way, if it becomes a gift, you won't violate the $14,000 per year gift exclusion that the IRS allows. If you have a late-model car, that is good collateral, you might get a credit union loan, probably less than 5% and 4 years. And you won't have to encumber the deed to the house.

As you say, insurance sales starts slow - the manager tells the noobee to cold-call all of his relatives to 'practice' as well as build contacts. And it's hard for people to turn down a friend/relative, so he'll score some family sales (expect to be hit up for insurance, lol).
Post Mon Aug 17, 2015 8:14 pm
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craigd
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Speaking of insurance...do you have a life insurance policy currently? The cash value in a policy can be used as collateral for a loan that will most of the time either be interest free (direct recognition aligns the loan interest rate with the current interest earned on monies within the policy) or a slight arbitrage opportunity (the current interest earned outpaces the charged interest rate for the loan). In some instances, the charged interest will outpace the current interest being earned, but your insurer should be able to go over the potential likelihood of this event with you.

If this is an option, then I would definitely consult with your insurer to go over tax implications as well. Most instruments are FIFO (First In First Out), so your paid premiums are taken out first before any taxable gains. Loans and withdrawals are analogous term, and essentially a loan shifts to a withdrawal after a predetermined amount of time, typically a year; however, the same activity is occurring with both a loan and withdrawal as you are withdrawing from the current cash value in your policy, but the amount withdrawn is treated as remaining in the policy and earning interest as noted above with a future promise of repayment.

If the money cannot be repaid, you usually have the option of reducing the death benefit to both decrease your premiums and extract additional taxable gains tax-free. This is dependent on the instrument, insurer, and any riders attached, but is a nice safety net in case repayment from your son takes longer than anticipated.

I am a Financial Advisor with Ameritas here in Omaha, NE and would love to connect with your son if he ever needs guidance, advice, or just a sounding board. Please feel free to pass along my information.
Post Mon Nov 23, 2015 3:06 pm
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