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Borrowing against your home?

A common question asked, are my thoughts on HELOC’s, or Home Equity Lines of Credit. This is not a new source of borrowing, but certainly one that has become more common today due to large increases in our residential property values. Who wouldn’t want to borrow money at 4% today, when they could pay off credit card debt sitting at 18% or more?  The basic problem starts with our desire to have the material things in life today rather than saving up for them, and purchasing in the future. Most of us, including myself are guilty of this. I see clients regularly with thousands of dollars in credit card debt, and with fixed incomes, a daunting task to pay them off. There’s a reason the government legislated the credit card companies to start disclosing the actual time it would take to pay a balance to zero. A wake up call to all of us, that there’s a heavy cost in satisfying our have it now mentality.  So now the HELOC becomes a very interesting option, to either consolidate debts, or get an inexpensive, unrestrictive source of funds to do with what you like. The thing that people forget though, is that the reason the banks offer you the lower rates, is that they are secured with a mortgage( yes you read that correctly- a HELOC is a mortgage against you’re home) that almost guarantees them that they will get their money back at some point in time, whether you like it or not. It‘s amazing how often people say to me with pride, that they paid their mortgage off, and yet they have a large mortgage which is their HELOC.
I ONLY recommend getting a HELOC for a specific need such as a renovation that you know will add value to the property, or for an emergency. It‘s just another way for the bank to make it easy to pull out your hard earned equity, and spend it without much thought. There was a time society thought of their home as an investment that would hopefully appreciate, with their mortgage being paid down over time. When retirement comes, you would be living in a home free and clear of debt, therefore no mortgage payments, and a more financially secure future. More and more I am seeing those nest eggs being eroded, with the money being used for purposes they should never have been used for, such as expensive holidays, purchasing cars, and paying off frivolous credit card debt that should never have been spent in the first place.
If you must have a line of credit, get it separate from your 1st mortgage(as a second mortgage) and then it leaves you options when your 1st comes up for renewal. Remember that lines of credit have a floating rate and therefore are exposed to fluctuating rates in the future. Today we are at a point of historical low mortgage rates, and it is only a matter of time before they begin to rise. And when they do, it will be anyone’s guess to how quickly. Now is the time to be paying down useless consumer debt, not getting into more of it. On the other hand, low rates make for a great time to be purchasing long term appreciable assets such as real estate, or things you need such as a vehicle, I just don’t believe in using the equity in your home as a source of easy money to satisfy that have it now mentality.

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