Author Topic: Credit Card or Home Equity Loan for short-term debt  (Read 2383 times)

brian313313

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Credit Card or Home Equity Loan for short-term debt
« on: July 11, 2017, 11:25:01 AM »
Hi Fellow Mustachians,

I am totally burnt out on my job and need to quit. I don't have savings at the moment. This is due to a cash home purchase 9 months ago and about 50k in remodeling since then. I make a lot of money compared to my bills and can find another job quite easily. My benefit of living a frugal lifestyle is not being locked into a shitty job. I need to finance the time off and possibly the rest of the home remodeling. This time off will include a very needed vacation.

To finance this, an HELOC would be my best choice. Unfortunately, I had a foreclosure 6.5 years ago and cannot get one because of that. I tried with quite a few banks and they all said 'no'. They all also said they'd be happy to give me a first mortgage or home equity loan. Closing costs would be much less for a home equity loan.

Numbers:
Expected time out of work: 2 months. It usually takes me under 2 weeks to find employment when I can search full-time. I'm in a high-demand IT area. You never know for sure though. I wouldn't start looking until I'm refreshed.

Salary now: Monthly almost 7k after tax + 2k 401k contribution. May go down to 6.5k afterwards since nobody in my network is hiring. I normally stick with people I know and they're willing to pay over market. Market rate is 120-130k for my skillset and location. I have a spouse with no income so when I quit, our income drops to 0.

Expenses: Monthly about 2.5k not counting slush spending. However, we've been getting hit with a lot of unexpected expenses lately and may have some medical coming up soon. Slush spending is for things that bring happiness, but are not strictly necessary. For example hobbies and vacation travel which I want to do during the time off.

Cash-on-hand: About 5k today, maybe 6-7k after 2-3 week notice is done.

CC limit - 20k. Balance is paid off every month, but we hired a contractor for some of the work and I upped the limit so I could get the rewards.

Home equity amount: I would probably also take 20k over 5 years. I will pay this off early once I am back employed, but will be paying interest on the whole 20k from the start. I'm not interested in counterbalancing that by investing short-term.
Home equity rate: 4%.
Closing costs: about $400.

CC rate: 21%. This would be first priority once I go back to work and would be gone shortly.

I was leaning towards just taking the home equity loan which could close in about 2 weeks, but my wife thinks the CC route would be cheaper. CC route is easier. When I started to think about it she may be right. Looking for second opinions here.

There are some known bills coming up. They are accounted for in the 2.5k monthly spending, but on a pro-rated basis. The actual payment is coming soon:
Property taxes about 2k billed in August and due in September sometime. Can not be put on CC without a cash advance which ups the cost quite a bit.
My wife's annual physical + she's 50 now so cardiology visit is in order. Can be put on CC.
Maybe $1500 remodeling. This can wait but it will be done and it would be nice to get this damn remodeling done. It's been going for 9 months now. This is just labor and I might be able to do the work myself. It's plumbing and the hardest part is turning off the water. Someone installed an oversized HVAC unit in front of the shutoff. I'm getting older and not so flexible so I'm not sure if I can get that. I may punch a hole through the drywall so I can stick my hand through, but I could only ever fix one side of the drywall. It's not such a big deal since it's in an outside closet.

Withdrawl from my 401k would be really expensive, but can be used as a last resort. Next year it wouldn't be such a big deal, but I've already earned enough this year to put a big tax burden on top of the 10% penalty.

I'm just looking for advice on the CC vs. Home Equity loan. I know some will think I should wait to quit but I already have, and have again, and now I'm done. My job changed and it totally sucks. I need to leave before I start burning bridges. (Friday, I had a bit of an outburst. Oops!) I've made no bones about my problems with my boss but he can't do anything. He's too much of a wimp to challenge another department and has stopped me from doing so.

Also, all I really need to do is make the 2.5k + slush until I'm 62. My 401k is large enough to grow into what I need by then, and then some.

Thanks.


ketchup

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #1 on: July 11, 2017, 11:37:09 AM »
I'd apply for a credit card with a 0% promo rate on purchases (most are 12 months).

brian313313

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #2 on: July 11, 2017, 11:43:01 AM »
I'd apply for a credit card with a 0% promo rate on purchases (most are 12 months).

Thanks. That's a great idea. Normally I think in rewards because I don't pay interest.

Lady SA

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #3 on: July 11, 2017, 01:18:06 PM »
sounds like, since your 401k is healthy and at this point you just need to sustain yourself and leave it grow, this thread may be of interest to you:
https://forum.mrmoneymustache.com/post-fire/early-retirement-vs-serial-mini-retirements/

There is no advice there regarding how to fund a few months of 0 income with no buffer though. That does seem a bit irresponsible to me but I understand being at the end of your rope with your job.

My only advice would be to try to minimize the amount of time you are unplugged from the workforce to reduce the load of debt you are taking on. And be careful with the next job you take on, maybe a lower stress one in academia or something if you only need ~$3k per month?

In the meantime, if your options are a home equity loan or a CC, the 21% interest on the CC seems ridiculous. Couldn't you open another, much lower interest CC account for this purpose? I'm thinking along the lines of a 0% balance transfer card for X months -- I've never done one of those, but ostensibly you would be back earning high income in a few weeks and could pay it off before interest starts accruing. what ketchup said lol
« Last Edit: July 11, 2017, 01:22:34 PM by Lady Smartass »

ketchup

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #4 on: July 11, 2017, 01:24:35 PM »
I'd apply for a credit card with a 0% promo rate on purchases (most are 12 months).

Thanks. That's a great idea. Normally I think in rewards because I don't pay interest.
¿Por qué no los dos?  There are a few decent rewards cards that also have handy 0% interest promos (Amex Blue Cash Preferred, Chase Freedom and Freedom Unlimited, etc.).

Lance Hiruma

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #5 on: July 11, 2017, 01:34:07 PM »
Credit card for sure...

brian313313

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #6 on: July 11, 2017, 01:57:28 PM »
sounds like, since your 401k is healthy and at this point you just need to sustain yourself and leave it grow, this thread may be of interest to you:
https://forum.mrmoneymustache.com/post-fire/early-retirement-vs-serial-mini-retirements/

There is no advice there regarding how to fund a few months of 0 income with no buffer though. That does seem a bit irresponsible to me but I understand being at the end of your rope with your job.

My only advice would be to try to minimize the amount of time you are unplugged from the workforce to reduce the load of debt you are taking on. And be careful with the next job you take on, maybe a lower stress one in academia or something if you only need ~$3k per month?
Thanks for the feedback. That's a great thread and I've done "mini retirements" throughout my life. My first five years of making more money I probably only worked six months/year. Once I had about 5k an adventure would "break out" and I'd have to go. :) Those days were fun but I have more on the plate these days. I also make more by behaving more responsibly with work now. I finish projects which is why people who know me will pay a little more. Before, I just gave two weeks and left and didn't care how it affected the project.

I agree with the irresponsible part. I've never lived paycheck-to-paycheck and doing this for the last 9 months has been quite stressful. It's somewhat of a trade-off between building an emergency fund vs procrastination on the projects. I have a hard time waiting when I know it needs to be done. Also, some of the things that have come up needed to be done. A/C broke a couple months ago, etc.

I'm glad I posted this because the idea of getting a new 0% card didn't come to me. This community is great for that kind of advice. I'll be looking for the MMM credit card page and see if he has any links. I see a 21 month 0% interest card with Citi and since I already have one of their cards it shouldn't be a problem.

brian313313

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Re: Credit Card or Home Equity Loan for short-term debt
« Reply #7 on: July 11, 2017, 02:21:48 PM »
¿Por qué no los dos?  There are a few decent rewards cards that also have handy 0% interest promos (Amex Blue Cash Preferred, Chase Freedom and Freedom Unlimited, etc.).

Thanks for the suggestions. I got the Amex Blue Cash card. This has less cash back than Preferred but has no annual fee. The preferred card had an annual fee of $95. I get 2% on my Citi card with no annual fee so I'll be sticking with that long-term. Chase Freedom was also no annual fee but they declined me. I have good credit but not excellent.