Have some people mis-used Home Equity Lines of Credit? Absolutely! In the mortgage meltdown of 2008, a lot of people used their equity to enhance their lifestyles, putting that spending “on the house” instead of on a credit card. (A colleague recently told me about a grandparent who maxed out $175,000 of home equity treating their grandkids to gifts and expensive trips – quite a sum.)
People are free to do what they want with their money. But no prudent banker, financial advisor, spouse, family member or friend would advise that kind of spending for anyone without unlimited financial resources.
There is another, better way to think about a Home Equity Line of Credit – something that makes the idea of having one worthy of serious consideration by even the most-dedicated-to-being-debt-free homeowner.
In fact, I believe that every homeowner who can handle debt responsibly should have a Home Equity Line of Credit. And I’m not just saying that because I’m a banker.
A homeowner’s equity is often a significant financial asset – especially in metro Boston where housing tends to hold its value or even go up quite a bit. There are plenty of people around here who paid $300,000 (or less!) for a home that could now be worth $500,000 (or more!).
That’s real money. Which means their home equity can be a substantial kind of “savings” or “investment” account that a homeowner owns. For many, their equity is where a large part of their wealth is.
Every homeowner eventually has to pay for some big-ticket item. It could be a new roof, renovations, a new car, college … something important.
If you are 100% sure you can trust yourself with credit – and that’s key! – it turns out that for many homeowners, tapping their equity is the perfect way to get financing because:
>> With a Home Equity Line in place, you don’t have to apply for a loan every time you need to finance something. You can act quickly with total flexibility.
>> Unlike accessing retirement or investment accounts, borrowing against your home equity is not an income event. There are no taxes to pay and no worries about Medicare surcharges from an income bump.
>> The interest rate on an equity line is generally much lower than other forms of credit. Way less than credit cards!
>> It can be easier to pay for college or car financing – considerably less rigmarole.
>> Home Equity interest is often tax-deductible. Be sure to check with your tax advisor.
>> And – best of all! – since most equity lines do not have non-use fees, if you’re not using your Line it isn’t costing you anything. (If you’re still paying a non-use fee, you may want to have a discussion with your banker.)
The trick to using a Home Equity Line of Credit successfully? Forcing yourself to immediately start paying back any amount you take out with the goal of having it all re-paid within a reasonable amount of time, just as you would with any other loan.
For example, if you use your equity to buy a car, your banker will be happy to give you a schedule of what your monthly repayments should be to repay the loan you made to yourself in a “regular car loan” span of time, ideally a few years at most.
That guarantees you pay the least amount of interest and lets you re-build your equity so it will be there if you need it again. Which is the smart, safe way to put this powerful financial tool to work for you.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to email@example.com.