I was quoted in an article by NerdWallet that you can find here: How to Safely Tap Home Equity in a Financial Emergency. The article helps break down differences between HELOCs, cash out refinances, and home equity loans.
HELOCs provide security and flexibility for you as long as they are used responsibly.
They can help provide flexibility and security for those who need to build up an emergency fund. For example, flexibility, in case you are transitioning from one job to the next and security for the unknown expenses that may pop up like a flight being cancelled or needing to take extra unpaid sick days.
HELOCs can help one double up on charitable donations, contribute to IRAs, 401(k)s, ESPP, HSAs, and/or other tax effective tools at the end of the year. These strategies should be carefully planned so that the tax benefits will more than outweigh the amount of interest you will pay.
Home renovation projects or down payments on real estate properties can provide lower interest ways to accomplish goals (with careful consideration). HELOCs can also help with adoption expenses, consolidating debt, purchasing solar panels, estate planning, and/or other family goals. The access to your home equity can allow you to take advantage of opportunities. As always proceed with careful deliberation. For example, if you are looking for a car and find the right deal at the right time - a HELOC can give you the cash quickly enough to make the deal happen. You can then go and get the car financed under a car loan if you work with your bank within enough time. Ideally it would be better if you get pre-qualified for a car loan, but the HELOC gives you the flexibility to work around "deals."
Do Not Borrow Against Home Equity If:
You plan on moving in less than 3 years. Typically there's an early closure fee of ~$500 if the HELOC is closed in less than 3 years of opening it.
You/your partner tends to max out credit cards or feel like you will use it irresponsibly.
Using a large amount on your HELOC could hurt your credit score as it increases your credit balances
You only make interest only payments, then the debt will always stay the same.
Make sure you can afford to make the payments - especially if interest rates increased by 2, 3, or 5%! This is especially important if your balance on a HELOC is large.
If married, strategize to apply for a HELOC/HEIL under one spouse. This helps allow the other spouse to maintain some flexibility in qualifying for loans/lines of credit down the road.
Interest rates can vary based on how much you qualify for on a HELOC. For example, interest rates are probably higher if it's less than $50,000 so it may be better to apply for a higher credit limit than you need in order to qualify for the lower interest rate.
Make sure to work with the banker to get quotes on a HELOC vs a HEIL. A HELOC is like a large credit card with a low interest rate. A HEIL is a second mortgage typically with a fixed payment each month. You should also be getting quotes from multiple banks/credit unions because every credit union/bank has different terms of how their HELOC works.
The HELOC provides more flexibility while the HEIL provides consistency. The HELOC has variable interest rates whereas the HEIL usually has a fixed interest rate. Make sure you consider both because a HEIL can often make sense for larger home renovations or goals while a HELOC makes sense for smaller expenses or goals.
Many banks or credit unions don't charge an annual fee for just having the HELOC open, but some do. Make sure to shop around especially for HEILs (Home Equity Installment Loans) since these will likely have closing costs. HELOCs may have closing costs and/or appraisal fees.
Make sure you keep your HELOC information in a safe and secure place. If someone gains access to your account information it's not as easy to turn off or "lock" like a credit card.
Become a member or client if you would like a copy of the investment newsletter each month. As always - reach out with any questions. Best,
Blake Jones, CFP®, EA
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