One of the things that people sometimes do when they have a bit of equity in their home is take out a home equity line of credit. It’s certainly not unusual, but it’s not always the best decision, either. You see, not everyone uses this line of credit in the best possible manner, which means that sometimes you end up spending money that is tied to your home on things you probably should not. Imagine my surprise when I came across an article the other day from a national bank that lends mortgages and home equity lines of credit to those in need and saw that they were offering a home equity line of credit for various reasons.
The caption of the article indicated that all homeowners with a bit of equity in their homes should consider applying for their home equity line of credit so that they could go out and spend money on a few important things. At first I didn’t pay much attention to it, but that’s when I noticed that this bank was offering up bad financial advice. They want their customers to take out the equity on their homes and buy a new car or go on a big vacation or get plastic surgery or whatever expensive thing they want to have.
Excuse me, but um, isn’t this part of the reason so many homeowners were in serious trouble less than a decade ago? For obtaining mortgage payments they can’t afford and losing their homes? It’s not part of your mortgage payment, but that home equity line of credit is part of your home’s payment, and it’s bad news not to make those payments. So, it’s my own personal common sense that tells me you don’t want to pay for a vacation with your line of credit; how long will you pay for your home equity line of credit? Ten years or longer? Would you really pay for a new car that long?
We’ve taken some of the suggestions this nameless bank is giving to customers, and we’ve broken them down into reasons why it is or is not a good idea to spend money taken out against your home on these things.
New Cars – Bad Idea
Listen, no one keeps a new car for very long. I don’t keep my cars for more than two years. Do you want to have a car that you’ve paid “Cash” for and have no payment on? Of course you do! But let’s remember this; that money is money you took out as a loan from the bank you’ll be paying back for a long time. Let’s say you use your home equity line of credit to pay for a new car and you spend $40,000. You don’t have a payment – from the dealer.
But you do have to pay back that line of credit. You get rid of the car, get a new one and a loan from the bank for $25,000. Now you’re paying back the $40,000 you spent on the first car that you traded in for a new one and took out a loan for the remaining $25,000 for. Does that make sense?
Remodel or Add On to Your Home – Great Idea
Taking money from your home to make your home more valuable is just fine. It’s what a home equity line of credit is for, really. You are adding value to your home that you will recoup when you sell your home. That allows you to pay off that line of credit and still have some extra cash, which is always nice.
Go On Vacation – Bad Idea
I know it’s so tempting to book that dream trip to Bora Bora or Paris using your home equity line of credit, but don’t do it. It’s not a good idea for about a million reasons, including the fact that you’re still paying for your vacation in 10 years when you’re making equity payments every month. Your vacation is over, but you’re still paying for it a decade later. That vacation is not going to earn you more money when you sell your house, so it’s not a great idea.
Upgrade Your Landscaping – Good Idea
Your yard is the first thing that people see when they drive up to your home. It’s a lovely space that allows people to create a very distinct first impression. Great landscaping might mean you can ask more for your home when you sell it at some point in your future. The point here is that you are borrowing money from your home to improve your home. This provides the home with additional value, makes it worth more and pays you back in the end. That makes it a great investment for your money; which is what you want when you borrow money against your home.
Photo by Getty Images