What They Don’t Tell You About HEL

Thinking of dipping into your home’s equity? There are a few things you should know.

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There was a time, and not so long ago, that borrowing against a home’s equity was tough to do. Following the crash of 2008, it was generally considered a risk no prudent homeowner should consider.

Not anymore.  According to the Federal Reserve, 2013 saw a big turnaround in home equity borrowing. Americans borrowed a record-breaking $701 billion in home equity loans, curiously referred to as HEL in the industry.

Lenders, in an amazing shift from what’s good for homeowners to what will boost their profits, love to advise homeowners to pay off their high-rate credit card debts with low-rate HELs. There are, however, a few things they don’t tell you.

1. Equity is a concept not a savings account. Equity, the difference between what you owe on your home and the amount you could sell it for now, is just a number. It is a theory, it is not cash in a savings account. The only way you can benefit from the equity and still live in it is to pledge the equity as collateral for a new loan. You are promising to give the cash to a lender if and when you sell. In the meantime you agree to make mostly-interest payments. And that plunges you into debt.

2. You’ll have a false sense of well-being. Transferring debt to a HEL can bring a kind of false sense of relief. Writing out big checks to credit0card companies from the loan proceeds feels righteous, like you are repaying debt—that you have achieved $0 balances on your unsecured debt. But that’s not exactly true. You are only moving your debt around. You can breathe again. And the old feelings of entitlement surface. You begin using the credit cards again. Before you know it the cards are maxed out again. But now you have the HEL, too.

3. It can be more costly. That lower-interest HEL could easily end up costing more than the higher-interest credit-card debt. Comparing credit-card debt at 16.99 percent to a HEL at 7.25 percent may not be as clear-cut as it appears. Just recently, I compared that very thing for John and Cindy P. who were considering a HEL to pay their $15,000 credit-card debt. What we discovered: Using the Rapid Debt-Repayment Plan (RDRP) they can pay it in full in just 4.5 years including $4,775 interest. If however, they shift that debt to a $15,000 HEL at 7.25 percent it will cost them $9,647 in interest and take 15 years to repay. Using home equity to clean up high-interest debt might appear to work, but there are less costly options. Like your own RDRP, personal discipline and persistence.

4. Spending your next down payment. Statistics say you will live in your home about seven years. That means your equity is the down payment on your next home. If you start nibbling away at it to pay for a wedding, a fancy vacation or college tuition (common reasons for HELs) you may be reducing or eliminating your relocation options.

5. You could find yourself upside down. Borrowing against home equity could put you in a precarious position if the real estate bubble bursts again and home values start to drop. If your mortgage plus HEL exceeds the market value, you may find yourself stuck with a home you cannot afford but cannot sell, either.

6. You could lose it. People who use home equity loans tend to do it again and again and again. They get stuck in the notion that the equity is their money to do with as they please. They never figure out how to manage their income and learn the hard way that the penalty for falling behind on equity payments is losing their homes.

When it comes to home equity, here’s the best advice: Watch it but keep your hands off. The difference between what you owe and what you own may be the only appreciating asset you will ever know. Guard it tenaciously. Do nothing to impede and everything to encourage its growth.

Years from now when you make the final mortgage payment and your home is all yours, you’ll be thankful you decided to think for yourself and turn your back on HEL.

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4 replies
  1. Valkyrie Ziege
    Valkyrie Ziege says:

    ; People live dangerously outside their means via eating all their meals in fast-food places, restaurants, coffee-shops, combined constant impulse buying especially of popular products. Economic envy is a death-trap. Don’t keep up with “the Joneses”, it will only push you into further debt that “the Joneses” won’t be paying, you will. https://youtu.be/AmxWbEfdiZI

    Reply
  2. noHELforUs
    noHELforUs says:

    Amen sister! We made that mistake several years ago and took out a very large HEL with the intent to use it for mostly home improvements…most of which never got done. Unfortunately, the money was trickled away by our poor spending habits, including a trip to Europe that we should never have taken. And, we agreed to a 10 year term, ugh!

    By God’s grace we finally woke up (after I became pregnant with our second child). We acted as if we only had one income and began using my paycheck to pay it off. It ended up taking a little more than half the duration of the loan period to be rid of it. We sent the very last payment right when our baby was born. What a relief. That was a few years ago. If we didn’t change we would still be making payments now and wasting money in interest. Now I am able to stay home with the kids and we live debt free except for the house. A valuable lesson was learned over here. NEVER take out a Home Equity Loan. We now bite the bullet and save up before doing home improvements or taking vacations. It is so liberating!

    Reply
  3. Lise
    Lise says:

    One thought – a home equity LINE OF CREDIT actually removes item 3 from the list, because it can be paid as quickly as desired without penalty and interest is only charged on what is actually currently on the line.

    Reply
    • Lisa C.
      Lisa C. says:

      That is good to know since I just took out a HELOC to pay off a high interest credit card. Then my car broke down and I had to use some if it again. I am NOT paying just interest only, but paying the same amount I was paying on the credit card and no plans to use that card again.

      Lise-can you e-mail me direct? I have a question on the Abraham Lincoln book you made a comment on. [email protected]

      Reply

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