Posted: 12/2/2006 1:48:14 PM EDT
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The pros and cons of and the wisdom of: 1. Home Equity Loans 2. Home Equity Line of Credit A little background on my situation is that one of the family vehicles is really beginning its downhill slide to death. We have been thinking of purchasing a new to us vehicle; namely a full size pick up. However, we aren't that excited about having an auto laon again. But we want to be smart about what ever money we do borrow amd not uincure a lot of debt as our only debt is a very small credit card adn monthly bills. I know the smart thing is to save and pay cash but I don't think I can nurse along the ride for that long; one income family and all. Anyhow just in need of soem education and any advice you finanacial gurus here can give. Thanks. |
| I never had a home equity loan nor line of credit. So you save some $ writing off interest, BFD. Ask what will happen if you can't make your home equity loan payment vs a run of the mill car payment. In one scenario the car gets repossessed, in the other the house. |
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Loan: payment, rate, amount loaned is fixed. (some principal is paid down with interest) Line: can vary payment (can be interest only depending), rate is not fixed, can draw more credit (like a credit card) Each type of debt should match its funding purpose. Lines are best for temporarily arising needs (able to make 0 balance in the same year.) Loans are best for home improvements, capital expenditures fixed, depreciable assets like vehicles, buildings. If you use lines to fund these long term things, they tend to never get paid off and thus cost you more interest over the long haul..they tend tend to get refinanced into term (loan) debt. |
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Once the house is paid off many folks get a HELOC for catastrophic/emergency expenses. For example, suppose your mortgage is paid off and you have a bad accident, get sick, whatever. If you have an untapped HELOC you can draw on the equity in your home to cover the major medical bills until you get back on your feet. If the HELOC wasn't set up in advance you wouldn't be able to get one while you were sick since you couldn't show current income. As has been mentioned, obviously if you can't pay it off you could lose your home, so it should be used carefully. |
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My advice? I would NEVER get a home equity loan or lin of credit. If you were able to pay your martgage, you should be able to save. If you can afford a payment for a car, you can afford a vehicle savings plan every month. Why put your home at risk over a vehicle? If you must have a vehicle, and cant afford one, then borrow on the vehicle... securing the loan with the value of the vehicle. That way, if something bad happens to your single income family... you simply lose the vehicle... and you arent out on the street. You will find, even a BAD interest rate on a short term loan, like a car, is not as painful as it is on a long term loan like a home. The difference between 3% and 9% on a 4 year loan, on a reasonably priced vehicle... is not a big deal. Figure out what your monthly payment would be for the car... and start saving that or more today. You might be surprised how long your other vehicle can last, or how much you can save toward putting cash down for the car. The big thing to remember is that cars rarely "die" unless it is a major component failure (engine/tranny) and the repair is worth more than the cost of the vehicle. Annual cost of repairs are almost always less than any car payment. |