Tuesday, April 25, 2006

Home Equity Loans

A lot of folks have home equity loans called Home Equity Lines of Credit or HELOC. They are easy to get. You can apply while waiting in the check-up line at your favorite grocery store and be approved by the time your grocery bags are loaded. Most of us don’t have a problem figuring out how to use an extra $20,000 or $30,000 from a HELOC. For most there is always more things to buy and do and bills to pay than money coming in each month.

Since 2002, 300,000 homeowners in the Capital Region have taken advantage of HELOC for a combined total of $22 billion according to La Jolla-based DataQuick Information Systems. In California, 1.2 million of us have a combined debt of $137 billion for our HELOC. HELOC are becoming like house pets. Everyone has one.

The attractiveness of home equity loans is wearing thin. HELOC interest rates are based upon the prime lending rate, which has been steadily increasing, and just like a new puppy, they require more feeding as they grow older. HELOC will be around long after the stuff that they paid for is forgotten.

The most popular use of HELOC loans is debt consolidation. Paying off the car or credit cards feels good and the interest rate on a HELOC is usually tax-deductible. The second most popular use of the loan is remodeling. The best use I have seen of using a HELOC was a client who returned to school to get her degree. Her earning capacity has now substantially increased and her additional earnings go toward paying off the loan. The most questionable use of a HELOC was a client who used his proceeds to purchased stock in a friend’s new company. He eventually lost his friend and his stock but he still has his HELOC.


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