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5 Tips For Savvy Use Of Your Home Equity Line Of Credit
By: Tim Paul
Tapping your home’s equity to pay college expenses, consolidate credit card debt
or even to buy a new car or boat is common place. Many economists attribute the
additional buying power afforded consumers through home equity debt as a primary
reason the nation’s economy has been able to emerge from the recent recession.
Yet, aside from simply allowing consumers to spendmore, the flexibility and
efficiency of a home equity line of credit (HELOC) can provide the financially
savvy person with the means to savemoney, make money or simply take advantageof
opportune situations he or she might otherwise miss out on. Here are five tips
to show you how:
Tip 1: Take Advantage of Higher Insurance Deductibles!
You probably know that raising deductibles on auto and homeowners insurance
policies can mean big savings on insurance premiums. If you increase the
deductible on a homeowner’s policy from $500 to $1,000, you'll cut your premium
by as much as 25%!
Yet many people don't do this because they fear they may not have the necessary
cash available in the event of a loss. With low-interest cash readily available
through a home equity line of credit you'll have the security and confidence you
need to raise your deductibles and reap the savings!
Tip 2: Lock In Big Savings!
Credit card companies (e.g. the GM card) frequently have shopping programs with
names like "Main Street Savings" on a 30-day free trial basis. These programs
allow you to buy discounted gift cards (20% discount) for major national
retailers like Target, Sears, and Home Depot.
The flexibility afforded by a home equity line of credit can allow you to
purchase (during the free trial period) a large amount of discounted gift cards
for major retailers you frequent. Then use these cards instead of cash or credit
when you purchase everyday items (The cash you would have spent can be used to
pay down the HELOC). Although you pay low interest on the home equity credit
line, you receive a front-end discount of 20% on everything bought. When
combined with store coupons and sales, you can realize total savings of 70% or
more!
In short, a HELOC provides the low interest cash availability to take advantage
of bargains like this that you might otherwise have to pass on.
Tip 3: Take Advantage of 0% Balance Transfer Offers!
We’ve all seen no-fee credit cards offering "0% APR" on balance transfers for 6,
12, and even 18 months. If you have a balance on your HELOC, you may be able to
take advantage of these offers. Here’s an example of how: last year I accepted
such an offer and promptly transferred $10,000 from my home equity credit line
balance (which had a 4.25% rate). Then I cut up the card!
For the next eleven months, I paid the monthly minimum credit card payment (3%
of the outstanding balance) by writing a check from my home equity line of
credit. In the twelfth month, prior to the expiration of the 0% offer, I paid
off the remaining balance with another home equity credit line check. During the
12 months, I also made sure to continue my regular payment towards the HELOC at
the same level, meaning that more of each went to pay down principal and less
went to interest.
Net result: interest savings of over $350.00, lower principal balance on my
HELOC, and a positive addition to my credit repayment history!
Tip 4: First Pay With a Rewards Credit Card!
If you're contemplating using your HELOC for a major purchase, you should
consider whether or not the merchant you are dealing with accepts credit cards.
Why? Because it makes a great deal of sense to pay first with a rewards credit
card and then pay off the card with your HELOC check. On a recent $14,000
bathroom remodel, I was able to charge plumbing services, cabinets, and almost
everything else to my Fidelity/MBNA 529 College Rewards MasterCard. This card
pays you back by putting 2% of everything charged into a 529 college savings
plan. Result: $280.00 in college savings that would have been missed if I paid
the bills directly with home equity credit line checks!
Whatever rewards credit card you favor, it's sensible to pay first with the card
whenever possible. Keep in mind, though, you must promptly pay off the balance
and not incur finance charges.
Tip 5: Replace Your 1st Mortgage with a HELOC Loan
According to Money Magazine, if you have more equity than debt and plan to stay
in your home for 3 years or less, you should consider replacing your first
mortgage with a home equity line of credit. HELOCs are currently available
around the country at rates of 4% or lower.
Even if rates increase a full percentage point each year, they'll still be low
when you pay off the loan. Best of all, there are no closing costs with most
HELOC loans so you won't have to worry about recouping them through interest
savings as you do with a traditional mortgage refinance.
A savvy person – using tip 3 in conjunction with tip 5 - might even move a
portion of his mortgage to a 0% credit card thanks to the flexibility of a home
equity line of credit.
About the Author:
Tim Paul is a financial management executive with more than 25 years experience.
His websites focus on personal finance issues and include
http://www.sagetips.com,
http://www.529rewards.com and,http://www.reverse-mortgage-information.org. |
