HELOCs - why EVERYONE should have one!
If you could have access to the equity in your home, regardless of whether or not you EVER tapped it, why would you not want it?
I’ve had this discussion with literally thousands of homeowners over the past 10 years and will continue to shout it from the mountain top!
The objections I hear are always the same: “I want to pay OFF my mortgage so why would I want another mortgage?” and “what on earth would I do with it?”. There are obvious disadvantages to the abuse of debt but the concept that most people continue to miss is that debt is a part of our financial life and managed wisely is GOOD.
Let’s look at the ADVANTAGES of just being able to access your equity, but first some basic assumptions:
1. Home Equity, in and of itself, earns 0% rate of return. The proof: property appreciation is based on the physical value alone (regardless of any underlying liens).
2. Home Equity, in and of itself, is NOT safe. The proof: look at the declining property values in California, Florida and Nevada.
3. Home Equity, in and of itself, is NOT accessible: The proof: try to take out a new loan after you lose your job or have a financial crisis.
Now that I have your attention, here’s just a few thoughts for you to ponder:
- Going into 2008 your Credit (FICO) scores will be the single most important factor in financing approvals. By using your HELOC to judiciously pay down and “balance” your debts, you may be able to improve your FICO scores significantly.
- By consolidating your consumer debts not only do you eliminate multiple payments (which in itself makes life easier), but you should also be able to significantly reduce the rate you’re paying. As a side bonus, that interest may be tax deductible.
- If you have a rough month and need extra cash for, let’s say, an expensive repair or medical emergency, you can access the cash in 1 minute. Compare this to liquidating an asset (stock?), taking a cash advance on a credit card, opening a new credit card or calling Uncle Harry for “help”.
- You suddenly lose your job (trust me, it happens! I lost my position overnight with NO warning at First Magnus Financial on August 15, 2007). Where do you get the cash needed to live? Write a check from your HELOC.
- You know you’re going to need a car “soon” and your best friend says his brother is selling EXACTLY what you would be looking for at a great price (really!). You write him a check, snag the deal, sell your old car, and pay back the cash taken from the HELOC - float yourself the loan!
- You decide it’s time to move-up to a bigger home but you need the cash from your present home before you can buy a new home. If you had access to it you could buy now and sell AFTER you move. Sure, you’d own two homes and have to make payments on both but that would be YOUR decision not someone else’s.
I don’t know the source of the following statement, but it went something like this: In time of trouble, if I own a home free and clear I have a problem; if there’s a loan on the home then the BANK has a problem. This adage has never been more true than now and here is the best example I can give:
Suppose you purchased your present home in 2004 for $350,000 BEFORE the recent value run up. By the time the market reached it’s peak in Fall 2005, that house could have sold for $500,000 effectively giving you $150,000 in untapped equity (wow!). Now, in 2008 it’s FMV is around $450,000 and you’ve lost $50,000 in equity (sure, only on paper). Had you opened a $150,000 HELOC in 2005 you would now have access to $50,000 MORE than the property is worth. I certainly do not suggest that you “take the money and run” but the fact is that you would have access to that cash and the BANK has a problem.
The bottom line is that your Equity is neither safe, liquid or readily accessible and LIFE HAPPENS! HELOCs are still easily available and their low cost makes them very inexpensive insurance policies. The old saying “cash is king” has always been true!
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