By Brian McKay
It’s simple. Very Simple. Get a Home Equity Line of Credit or HELOC. Now. It is simply one of the best financial tools you will ever have.
Many people fear having a HELOC these days. Their bad name was forged in the fires of over-exuberance that happened prior to 2008. Homeowners were seeing their home values rapidly increase and took out HELOCs thinking, “Let’s go spend the shit out of this thing because our home will be worth $50,000 more next year.”
So right now you are wondering about this thing that was once used to purchase boats and flat screen TVs back when they cost $4500. Didn’t people lose their houses and file bankruptcy? Wasn’t it irresponsible to have something tied to their home values?
Yes, to all of that, but then is not now. People spent too much in the mid 2000’s because rapidly increasing home values made them all feel rich. It is safe to say we have all learned our lessons by now. Well hopefully.
The problem is that the past is making many fear what every home owner should have right now; a HELOC. If you have equity and are responsible with credit, call your bank tomorrow and get the process going.
Here is why a HELOC is such a great financial tool:
Having a HELOC when you need it is HUUUGE (sorry to rip you off with the HUUUGE Bernie Sanders). It’s no secret that life in the United States includes some pretty bad randomness, with the biggest being that you are always only one serious health problem from bankruptcy. Ask yourself, “What would I fall back on in such a circumstance?” If your answer is anything close to a little piece of plastic that has horrific rates, it is time to reassess things.
HELOCs are the cheapest credit you can get short of tying up your funds for a secured loan. Without going into some big explanation, secured loans are just stupid unless you are building credit. Never mention that term again. HELOC rates are very low. Lower than any unsecured loan or line of credit. It is pretty evident that the cheapest credit is the best credit.
Credit cards are a bad backup when no other options exist and running them up above 50% of the available balance in hard times can hurt your credit score. Unsecured loans are great if you have a few days to get them funded and can qualify. Unsecured lines of credit are as good for flexibility as a HELOC but have higher interest rates. Simply put, having a HELOC already in place is the way to go.
A review of thousands of personal financial statements from high net worth individuals will show that a surprising amount of them have HELOCs. You might ask why wealthy people have HELOCs when they already have substantial assets, but high net worth individuals recognize the value of having access to cash on demand. Do what they do.
A HELOC is an awesome tax deduction if you have to use it. What other type of debt can say that? None, except your home loan. If you are going to carry debt, at least be able to write it off.
If you have high interest debt, nothing is better to pay it off with than a low interest rate HELOC.
Should an emergency come along that requires funds right away, having a HELOC in place means you have access to money when you need it. Another bonus is that if you have investments that are performing better than the interest rate you pay on the HELOC, you don’t have to liquidate them. You are now pocketing the difference between the high performing investment and the lower rate HELOC.
Not having to max a credit card in an emergency is a very good thing. If you need $4,000 and your credit card has a $5,000 limit, you are using 80% of your available credit which hurts your credit score. Taking $4,000 from a $20,000 line of credit is only 25% utilization, which is well below that credit score damaging threshold of 30 - 40%. Factor in the tremendous rate difference and credit cards are just pure doo doo.
Another great benefit is that if the rare “to good to be true” deal comes along you have credit in place to be able to make the purchase.
Peace of mind is a pretty big deal too. Just knowing you have a backup when an emergency arises might be the most beneficial thing of all.
HELOCs typically amortize over a 30-year period, which gives you tons of flexibility in repayment. Payments will be low when the unexpected arises, but the line can also be paid down early.
HELOCs do have a variable rate that can go up or down with changes in the prime rate. This really isn’t a big deal. Yes, there were horror stories of variable rate home loans resetting to much higher rates in 2007 which in turn caused people to default on their homes. Now is not then. Rate increases from the Federal Reserve are all but a nonexistent dream at this point. The Fed raised rates a quarter point in December and that’s all you’ll see folks (a zenruption piece tomorrow will discuss why this is). HELOC rates will stay low in this author’s opinion. Were they to somehow go up, they are still less expensive than any other form of credit you would secure at that point in time. Only in times of rapid rate increases do HELOCs pose any risk. We live in a new low rate economy and such risk is extremely low. HELOC rates should stay very attractive for a long time to come.
So… go start the process now. Call your bank and get a HELOC.
Brian McKay is a co-founder of zenruption and has his MBA from Boise State University. His passion is helping the average person navigate the complex world of finance. Over time, Brian has developed an impeccable palate for gas station hot dogs and seeks out large condiment stations with jalapeno's.
Featured photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license