Every week, it seems, I field questions from homeowners regarding using the equity in their homes to pay down higher interest debt like credit cards. Essentially, this can be accomplished one of two ways – a second mortgage (or the more fashionable term “Home Equity Loan” – or a Home Equity Line of Credit (HELOC).
Virtually every time, the HELOC gets my vote.
Why? Well, for starters, it’s structured more like a credit card, with a spending limit, versus a cash payout.
Most of us can’t handle a chunk of cash – that’s the truth, no matter how much you want to protest – and homeowners and their money are soon parted, leaving them with more debt and the goals they had originally set unfulfilled.
On the other hand, with the HELOC, you don’t have to use the money, you simply have the money available. You CAN pay off higher interest credit cards with it (essentially swapping the debt to a lower potential interest rate) and that can, in the long term, save you a lot of money.
But you have to do it properly.
And you have to have some discipline about it.
But for the disciplined homeowner who can manage their finances and follow a plan, a HELOC can be a powerful tool to help sort out debt.
It is NOT a cash machine.
In fact, to me, one of the biggest benefits of the HELOC is there are a few extra steps to using that equity, meaning you’ll think twice about frivolously using those resources, which, I hate to say, will ultimately save you money and keep you out of debt.
If 2020 is the year you’ve decided to get out of debt, then I strongly urge you to discuss the benefits of a HELOC with me and the team.