18 Dec Should couple stop retirement savings for home fixes?

Q. My daughter and her husband bought a house last year, but the mortgage and repairs have stopped them from saving to their 401(k) plans and IRAs. I think they should get a HELOC to pay for upkeep so they can still save for retirement. What do you think? They have no credit card debt now.
— Trying to help

A. Congratulations to your daughter and your son-in-law on saving to buy a house, and for staying clear of credit card debt.

Your concerns about their retirement savings come from a smart place. It’s hard for young people to balance the need or want to spend today with the long-term goal of building a nest egg for retirement.

So how should they proceed?

A home equity line of credit, or HELOC, can be a very valuable tool to access money to make some much-needed home repairs, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

This can help a couple avoid depleting their savings, he said.

“A HELOC can allow homeowners to access the equity in their home to borrow against it, if needed, for a variety of reasons, with home improvements being amongst the most popular,” Cocco said.

But as with all things money, there are multiple points to consider.

First, Cocco said, many banks may only allow homeowners to borrow up to 80%, or sometimes as much as 90%, of their home value.

“So if they just bought a home and put, let’s say 20% down, unless the house has appreciated substantially, they may not be able to qualify for a HELOC, when you consider their existing mortgage,” he said.

If they put down less than 20%, it may be even more difficult.

But if they put down more than 20% or if their home has already materially have appreciated in value, they may be good candidates for a HELOC.

Cocco said banks will also consider their income to ensure that the potential HELOC payments, plus their current mortgage payment, fall within the guidelines of what their target debt-to-income ratio is.

He notes each bank will have its own guidelines.

Even if they qualify for a HELOC, at minimum, they will have to pay interest on the amount they borrow — and will have to pay principal payments at a later date — so that must be factored into their monthly budget as an additional bill to pay each month, Cocco said.

On the retirement savings side, if either or both of them have a company match on their 401(k), Cocco recommends they at least contribute enough to qualify for the maximum employer match so they’re not leaving “free money” on the table.

“For example, if they need to contribute 3% of their salary to get a 3% match from their employer, they should do it immediately,” he said. “Also, the target percentage I usually advise my clients is to ensure they are saving close to 8-10% of their gross salary for retirement.”

A very important strategy for them is to separate what home improvements are truly “needs” and which improvements may be “wants,” Cocco said.

“Many homeowners would like to make multiple improvements right away, but they must come up with a budget plan, and may need to space it out over time,” he said. “Getting any employer match available to them should take priority over any `wants’ that do not need to be done right away.”

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This story was originally published on Dec. 18, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.