Author Topic: HELOC  (Read 1444 times)

TheInsuranceMan

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HELOC
« on: September 21, 2016, 12:35:57 PM »
Hey everyone (posting with understanding of the face punches that will come my way)

Wife and I have $5k of credit card debt, and every time we make large payments on it, we end up getting cash strapped and have something come up, and blamo, credit card gets swiped.

So, I talked by my bank about a HELOC.  $5k HELOC at 5% interest, $100 a month payment (min payment is 2% of balance) is all.  This would allow us to stock quite a bit of money away, and know that we aren't paying absurd interest rate on absurd debt (that we shouldn't have, and rarely have).  And, in doing this, we will be putting the credit cards away, until we are extremely financially solvent, and can use them to our advantage, which we obviously haven't done recently.

Debt was due to maternity leave, less income than expected, and some car troubles.  Regardless, it's there now, and we owe it, and I'm trying to find the best course for us to follow.  I like this idea because then we have an open HELOC if something were to happen and we needed the funds, and the interest rate is cheap, and the minimum payment is cheap.  Thoughts?

nereo

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Re: HELOC
« Reply #1 on: September 21, 2016, 12:49:25 PM »

Wife and I have $5k of credit card debt, and every time we make large payments on it, we end up getting cash strapped and have something come up, and blamo, credit card gets swiped.

So, I talked by my bank about a HELOC.  (lots of details on HELOC options)
Thoughts?

The underlying problem here seems to be that you are spending very close to or more than your take-home pay.  This is made worse because you don't have an E-fund available.  Both of those problems should be addressed or no amount of financial gymnastics will save you from yourself.

That said, responsible mustachians can use their HELOC to shift debt burdens so that they have a lower interest rate and are able to pay them off faster.  However, what's concerning is how you got here in the first place, and how you can be certain that you won't wind up there again.  The danger with using a HELOC is that it reduces your equity in your home and thereby increases the likelihood that you will be underwater should bad things happen.  Many people also use HELOCs irresponsibly to inflate their lifestyle; it works for a while, until more bad things happen adn then it all falls apart.

I'd start by taking a good hard look at why you aren't saving at least 15% of your income every month. IMO that's the absolute minimum target couples should shoot for. If you can't meet this target it's time for some hard life choices about what you can and can't afford right now.  Sorry...

Final thought: 5% HELOC isn't a terribly good rate.  Mine is currently 3.4% (but untapped).


TheInsuranceMan

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Re: HELOC
« Reply #2 on: September 21, 2016, 01:00:31 PM »

Wife and I have $5k of credit card debt, and every time we make large payments on it, we end up getting cash strapped and have something come up, and blamo, credit card gets swiped.

So, I talked by my bank about a HELOC.  (lots of details on HELOC options)
Thoughts?

The underlying problem here seems to be that you are spending very close to or more than your take-home pay.  This is made worse because you don't have an E-fund available.  Both of those problems should be addressed or no amount of financial gymnastics will save you from yourself.

That said, responsible mustachians can use their HELOC to shift debt burdens so that they have a lower interest rate and are able to pay them off faster.  However, what's concerning is how you got here in the first place, and how you can be certain that you won't wind up there again.  The danger with using a HELOC is that it reduces your equity in your home and thereby increases the likelihood that you will be underwater should bad things happen.  Many people also use HELOCs irresponsibly to inflate their lifestyle; it works for a while, until more bad things happen adn then it all falls apart.

I'd start by taking a good hard look at why you aren't saving at least 15% of your income every month. IMO that's the absolute minimum target couples should shoot for. If you can't meet this target it's time for some hard life choices about what you can and can't afford right now.  Sorry...

Final thought: 5% HELOC isn't a terribly good rate.  Mine is currently 3.4% (but untapped).

I appreciate the input, and to be honest, we should be saving that.  Well, we are, between HSA, 401k, and pension, but not 15% of our actual take home pay.  And there is an underlying problem with spending money in which we've worked on, and are doing better at.  But, what are you supposed to do when you've drained your EFund, and have another bill come up?  It still has to be paid?  Anyways, you're right, I know it, you know it, the board knows it.  It's a spending problem that needs to be reigned in, both my wife and I are at fault for it. 

We are committed to stopping how we spend, which really isn't on anything crazy.  No cable, eat out maybe twice a month - it came down to doing more to the house we bought this spring than we expected, a few daycare changes that doubled up a couple weeks of what we owed, and then my wife going on maternity leave.  It's all very solvable, and if I break down our income vs the bills that we pay, saving shouldn't be an issue.  However, with the credit card debt over our head, and myself making large payments towards it in hopes to pay it off, left us cash strapped, and thus, swiping the card again.

I know it's not a cure-all, but I think we might drastically benefit from it.  And, also, I'm talking $5k, not $20k, not using it on ANYTHING besides this.  And, the interest rate isn't great, but that's the floor rate of the bank that we use.

nereo

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Re: HELOC
« Reply #3 on: September 21, 2016, 01:13:45 PM »
Ok, well now that the face-punches are out of the way...
I see no reason why you couldn't/shouldn't use the HELOC to pay off your higher interest credit cards, but go into it with your eyes open.  If gradually that $5k grows to $8k and then $10k you haven't solved the underlying problem. A second (and potentially concurrent method) is to take out a new CC that has a 0% APR (12 month minimum).  I would do that first and put anything remaining on your HELOC

Additionally, I applaud you for putting money into your pensions, 401(k)s and IRAs. That's wonderful.  But with debt mounting and your e-fund depleted now might be a time to temporarily scale back your retirement contributions until your e-fund is re-established and this debt is gone.  Otherwise, all future emergencies will just go right back onto your credit cards or on your HELOC.  I think you already realize this.
Good luck!

TheInsuranceMan

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Re: HELOC
« Reply #4 on: September 21, 2016, 01:22:14 PM »
Ok, well now that the face-punches are out of the way...
I see no reason why you couldn't/shouldn't use the HELOC to pay off your higher interest credit cards, but go into it with your eyes open.  If gradually that $5k grows to $8k and then $10k you haven't solved the underlying problem. A second (and potentially concurrent method) is to take out a new CC that has a 0% APR (12 month minimum).  I would do that first and put anything remaining on your HELOC

Additionally, I applaud you for putting money into your pensions, 401(k)s and IRAs. That's wonderful.  But with debt mounting and your e-fund depleted now might be a time to temporarily scale back your retirement contributions until your e-fund is re-established and this debt is gone.  Otherwise, all future emergencies will just go right back onto your credit cards or on your HELOC.  I think you already realize this.
Good luck!

Thanks Nereo, and we do realize it.  We have for awhile.  Not putting blame on either one of us (dw or I) individually, because we both have our faults.  We spend a bit too much money on our kids, with toys and new books and the like, which we know needs to slow down.  Obviously, there is more than just that, but we understand the problem and are trying to remedy it.  I'm 97.6% certain that the HELOC won't get any more taken out of it than the $5k we want to use right now.  I'll leave that other 2.4% open for some crazy emergency that we need cash immediately for.

And, in our 4 years of being married, we really haven't ran into the problem as bad as it is now.  Everything kind of snowballed at a poor time, along with some discrenary spending, and here we are, with credit card debt. 

The pension is a set amount that the state mandates that my wife puts into hers if she has elected to use it, so that will stay the same.  I put a small amount into an HSA every month to get my employers matching funds, and then I put 10% into my 401k.  None of which I really want to stop, as it doesn't result in much money back in our pocket.  Given, I could put that 10% down to 0% (employer puts 3% in regardless), and hammer stuff out, but at 28 years old, I'd rather leave it and help grow the account.