The Hidden Challenges of Using Your Home
Ernie Neve, CPA
February 13, 2020
A few weeks ago, I had a conversation with a client who was exploring the various options for using the equity in his home as a way to pay down some other debts.
He and his wife had done their research for sure, and they had settled on the Home Equity Line Of Credit (HELOC).
Now, personally, I’ve always been a fan of HELOCs instead of a second mortgage or a home equity loan, because the HELOC is available to you when you need it, but since you’re effectively creating a line of credit based on the equity you have in your home, you don’t have to spend anything.
Read that line again…
You don’t have to spend anything.
With a second mortgage or a home equity loan, you give up some control of the ownership of your home (the way I see it) for a chunk of cash.
Most of us can’t handle a chunk of cash – that’s the truth, no matter how much you want to protest – and homeowners and their money are soon parted, leaving them with more debt and the goals they had originally set unfulfilled.
On the other hand, with the HELOC, you don’t have to use the money, you simply have the money available. You CAN pay off higher interest credit cards with it (essentially swapping the debt to a lower potential interest rate) and that can, in the long term, save you a lot of money.
But you have to do it properly.
And you have to have some discipline about it.
But for the disciplined homeowner who can manage their finances and follow a plan, a HELOC can be a powerful tool to help sort out debt.
It is NOT a cash machine.
In fact, to me, one of the biggest benefits of the HELOC is there are a few extra steps to using that equity, meaning you’ll think twice about frivolously using those resources, which, I hate to say, will ultimately save you money and keep you out of debt.
Now, one last thing before we close for the week – if using the equity in your home seems like a good idea, then talk about it with me and the team AND discuss it with at least two lenders. Talk with us to make sure it’s a good financial move and then shop around for the best rates.
Sound good? Great. Have a wonderful week and we’ll chat soon!