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Everything You Need to Know About HELs

Thinking of dipping into your home’s equity? There was a time, and not so long ago, that a home equity loan, or HEL, was tough to get. It was generally considered a risk no prudent homeowner should consider.

Whereas mortgage lenders used to adhere to strict guidelines that kept homeowners from getting in over their heads, the financial services industry now encourages consumers to stretch further and further, often to their peril. 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. Equity does not become cash until you sell the house and give up possession. 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 monthly payments. And that plunges you into debt.

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

3. It can be more costly. That HEL with lower interest could easily end up costing more than the credit card debt with higher interest. Comparing credit card debt at 16.99 percent to an HEL at 7.25 percent may not be as clear-cut as it appears.

4. Spending your next down payment. Statistics say you will live in your home for 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. No more deductibility. In the past, homeowners who took out home equity loans were able to deduct up to $100,000 of the loan’s interest from their taxes. Under the new U.S. tax bill, recently signed into law by President Trump, this deduction is a thing of past. The change takes effect in 2018, meaning the 2017 tax year is the last year homeowners can write off the interest paid on a home equity loan.

6. You could find yourself upside-down. Borrowing against home equity could put you in a precarious position if the real estate bubble bursts and home values start to drop. If your mortgage and HEL together exceed the market value, you may find yourself stuck with a home you cannot afford or sell.

7. You could lose it. People who use home equity loans tend to use them 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 money and learn the hard way that the penalty for falling behind on equity payments is losing their home.

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 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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Mary Hunt

Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, "Ask Mary." Tips can be submitted at tips.everydaycheapskate.com/ . This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book "Debt-Proof Living."

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