HELOC and SBLOC – Security Tools for Your Finances

The HELOC and the SBLOC are two tools I think all investors should have and are the ones most often overlooked.

How HELOCs Work

Most people are familiar with a home equity line of credit.  Homeowners go to a bank.  If there’s enough equity in the house and if their income can qualify to carry the payment on the available balance, they are granted an equity line.  That equity line is secured by the home equity.

HELOCs work like a credit card but usually have higher credit limits.  Like a credit card, you only pay interest on balances that you carry.  You can spend up to the available balance and if you pay it all off, it’s there to be spent again.  Super convenient.

Frequently these accounts have annual fees, but they are also frequently waived if you ask.

How SBLOCs Work

Not everyone has heard of a securities-backed line of credit. 

Like a HELOC, they are an equity line against an asset – in this case, it’s not a home but a non-retirement securities account. 

However, they are much easier to obtain because there’s no underwriting and there are rarely fees to set one up.  The line of credit is usually about 50% of the non-retirement account.

Like the HELOC, you can spend up to the available balance and if you pay it all off, it’s there to be spent again.  Super convenient.

Even better than the HELOC, however, the SBLOC has no required payments.  Yes, the balance grows, but assuming your stock portfolio does, too, even better.  This provides for a powerful cash management tool.

The best part about the SBLOC is that securities do not need to be liquidated with potential capital gains taxes to be paid to purchase an item or to pay for an expense.  That stock with long-term embedded capital gains can remain invested, AND you can meet your cash flow needs.

SBLOC payments also do now show up on a credit report, so it has less impact on future credit decisions.

Perhaps it’s no surprise that most investors who can get an SBLOC do.

Your Second Reserve Account

What I like about both of these options is that they are security tools.  This is not an advertisement for frivolous spending. 

Remember, I define financial security as the ability to weather any financial storm or take advantage of any financial opportunity.  These tools are here to provide financial stability.

I believe every homeowner should have a HELOC and every investor should have an SBLOC as well.  It’s just good financial planning.

But Why Pay Interest?

This is frequently the go-to question for those considering a HELOC or SBLOC.  This often comes from a place of fear and what investors think of as financial “prudence.”  They think, Why pay interest and increase the cost of a purchase when I can pay in cash?

In low interest rate environments, it is a no-brainer to use debt to manage cash flow.  Even in higher interest rate environments, it can be the smartest use of money for tax reasons, income reasons, and family wealth transfer reasons. 

When debt is used strategically there may be interest payments to make, but if it improves your financial position in the long run and increases your financial security in the short run, it’s a tool that can serve you well.

If you would like to talk HELOCs, SBLOCs, or the strategic use of debt, please reach out.