Question about using HELOC

[disneysteve]

He clearly can affort to make the payments, and as long as he get's a good interest rate, he is all set with the trailer.

People really need to confront their irrational fear of debt

I find it ironic that the same person posting this also posted the following just one week ago:

With help from forum members I have come to the realization that I may have to reduce my credit card debt load.

Liabilities
Primary Mortgage: 275,000 @ 3.0%
Rental Mortgage: 115,000 @ 3.625%
Credit Cards: 43,000 @ 0% (when is the next rollover that will cost 3% in BT fees?)
Student Loans: 19,500 @ 6.8%
Auto Loan: 20,500 @ 3.24%
Total: 473,000

Immediate Goal: Eliminate CC debt.

Why is it that you feel you need to reduce your debt load but are encouraging this poster to go deeper into debt at the same time?

Being able to afford the payments and being able to afford the purchase are NOT the same thing.

For the record, I do not have an "irrational fear of debt". I've paid off over 100K of student loans. I've bought and paid off a few cars. We have a mortgage. We've done 0% financing on furniture and a couple of other things over the years. We even took a HEL years ago to pay off some higher interest debt. I'm not averse to borrowing money but it needs to fit in the big picture of what is affordable and how we're doing overall with saving, spending, and investing.

[cardtrick]

Random2k hit the nail on it's head when he said he will lose 5-6 years of memories. He clearly can affort to make the payments, and as long as he get's a good interest rate, he is all set with the trailer.

Go ahead buddy! Get your trailer. You earned it. That too with a house worth 290K fully paid off. Are you kidding? It's a no brainer.

People really need to confront their irrational fear of debt (particularly at low interest rates) and along with that factor in the depreciating value of money. $1000 in 3 years is only $800 in today's money.

Yeah and on the flip side, there is the possibility of a job loss, large medical bills, unexpected expenses etc. If you stretch yourself too much with monthly payments, there is a good chance that it will end badly for you, regardless of whether you can afford the payments or not.

Besides, investing your money carefully is a good way to ensure that your savings don't lose value over time. So, the depreciating value of money argument doesn't hold.

[disneysteve]

OP, can you answer a couple of questions?

1. How much are your monthly expenses right now?
2. How much is in your emergency fund?
3. What percentage of income are you saving for retirement?
4. How much are you saving every month for your children's education, and what is the current balance of those accounts?

[dczech09]

People really need to confront their irrational fear of debt (particularly at low interest rates) and along with that factor in the depreciating value of money. $1000 in 3 years is only $800 in today's money.

Clearly you did not read my post all the way through, so thanks for that. If you did, you would know that this is not some irrational fear, but intuition that I have.

I have paid off over $40,000 and saved up over $40,000 in my first 5 years out of college. I have also sen my parents go from being broke to being poor. I know what it is like to be deep in debt, and I know what it is like to be debt-free. I prefer debt-free because of the opportunities that it provides.

My argument has been that of opportunity cost, not some fear of being in debt.

Your argument is completely wrong. $1,000 borrowed for 3 years is not $800 in today's money. Completely ridiculous argument. It is actually $1,000 today and $1,133 in 3 years (assuming a 4.25% APR). The APR outpaces inflation.

Just because the OP can afford the payments does not mean that he can afford the purchase. He has very little liquidity right now. He is over 30 years old and is far behind on retirement savings; he should have over 1 year of income saved up at this point! He also has little in general savings, which is why he "needs" this HELOC to move debt and buy a luxury.

Bottom line, he cannot afford such luxuries right now. Myself and DS are trying to help him settle on a good decision because clearly behind up to his eyeballs is debt is not working.

[HappySaver]

OP has likely been scared off by some people's overreaction to his car. Sheesh people, he had a very specific question and he made it clear the car was not it.

[disneysteve]

OP has likely be scared off by some people's overreaction to his car. Sheesh people, he had a very specific question and he made it clear the car was not it.

Sometimes people are asking the wrong question. I think it is the job of this forum to look at the big picture because the poster often isn't.

[HappySaver]

In principle I agree, but within the bounds of common sense. For a brand new poster, the ultimate goal is to help them, not drive them anyway. And it's not so clear-cut that the car is a such a problem for the OP, even though it wouldn't be what many of us here do. I just think some people's personal feelings have overshadowed the initial question.

[dczech09]

In principle I agree, but within the bounds of common sense. For a brand new poster, the ultimate goal is to help them, not drive them anyway. And it's not so clear-cut that the car is a such a problem for the OP, even though it wouldn't be what many of us here do. I just think some people's personal feelings have overshadowed the initial question.

The OP asked for my opinion in regards to my comment about the car being too much. It would be rude to ignore the question. Ultimately, it was not personal feelings but forum business.

Then others posted opposing viewpoints, turning this into a debate. I apologize if it got a bit heated. But I will not apologize for my passion and energy.

I felt my advice was appropriate and I answered the OPs questions with the intention of helping him. I was also trying to diffuse advice that I felt was inappropriate.

With that said, I will privately apologize to the OP.

[MKKShah]

The OP asked for my opinion in regards to my comment about the car being too much. It would be rude to ignore the question. Ultimately, it was not personal feelings but forum business.

Then others posted opposing viewpoints, turning this into a debate. I apologize if it got a bit heated. But I will not apologize for my passion and energy.

I felt my advice was appropriate and I answered the OPs questions with the intention of helping him. I was also trying to diffuse advice that I felt was inappropriate.

With that said, I will privately apologize to the OP.

I too apologize if my "opposing viewpoints" were in appropriate. But I just wanted to help. It seems like a clear cut case of affordability for the OP and who are we to deny him something that he has earned!

Saving money should be a goal seen right alongside enjoying life (if need be by spending some of it).

[MKKShah]

I find it ironic that the same person posting this also posted the following just one week ago:


Why is it that you feel you need to reduce your debt load but are encouraging this poster to go deeper into debt at the same time?

Being able to afford the payments and being able to afford the purchase are NOT the same thing.

For the record, I do not have an "irrational fear of debt". I've paid off over 100K of student loans. I've bought and paid off a few cars. We have a mortgage. We've done 0% financing on furniture and a couple of other things over the years. We even took a HEL years ago to pay off some higher interest debt. I'm not averse to borrowing money but it needs to fit in the big picture of what is affordable and how we're doing overall with saving, spending, and investing.

Again, please don't take my posts personally. I wasn't specifically talking about you. Some folks just keep insisting (without reason) on "paying cash". That may give *them* a peace of mind, but need not always be the best approach or the most appropriate for everyone.

Just to address the "irony" part:
- In general:
- I believe it is better to be debt free.
- A mortgage is not a bad debt, as long as the interest + taxes + insurance part of is comparable to rent for an identical place, AND is within a persons income.
-CC debt beyond a point can be dangerous. It is prudent to limit it and eliminate it when possible. Unlike a car loan where if things got un-affordable you could sell the car and settle the loan, with CC debts for non asset purchases you may not have anything to show. There will be nothing sell to settle the debt. (In my case, this is not true, but I would like to pretend that this was indeed the case and eliminate the CC debt).

So my suggestion was based on OP's specific circumstances. He has a fully paid off house, is in his early 30s and pulling in 85K pa. This is all fantastic and he can definitely afford the purchase.

I do think that the interest rates on his car not is high however.

[MKKShah]

This is a terrible idea! Put up the house that is paid off and sacrifice it with a lien all for a lower interest rate on a car loan that he should not even have in the first place?! Are you crazy?!

He will save MUCH more money by selling the car and buying a much more inexpensive alternative.

And that tax deduction is really no bargain. First of all, he has to itemize his deductions; if he takes the standard deduction then this is moot. Second of all, it has to be his primary residence. Third of all, he would pay over $4,600 on the car loan if pulled into the HELOC and save maybe $1,000 in taxes. He still nets a loss of $3,600 in that deal. And that does not even factor in any closing costs.

Keep in mind that this is only if he qualifies for a 4.25% APR. There are no guarantees with this deal.

I agree with the itemization point. Tax deduction on a HELOC comes into picture only if he itemizes. Good catch there.

What?! This does not make any sense.

Please explain how the depreciating asset does not come into play? The value of his vehicle (which is depreciating) will follow him over to his next car purchase. If his $38,000 car is only worth $10,000 in a few years (he should be so lucky), then that is $10,000 at most that he could put towards a new car purchase.

So how does depreciation only factor into bankruptcy or foreclosure when this is indeed a piece of net worth that we are talking about? He may as well roll down the window on the highway and toss out some Benjamin's! Quite frankly, that may make more sense than the HELOC.

How does a HELOC make sense in a scenario of foreclosure? If he consolidates all of his other debts onto a HELOC then forecloses, he loses his house. What does he keep? A crappy truck that will be worth nothing in 10 years when new gas efficiency rules are in place.

Why on earth would one put their paid-for house on the line for some vehicle?

The OP's finances are in good shape. He has good income, good asset base, and relative to his situation a small debt load. So he is not likely to file for bankruptcy anytime soon. That means he is likely to meet his financial obligations. This means that it does not matter whether a loan is a car loan or a HELOC or whatever else. As long as he can afford the monthly payment he could aim for the lowest interest rate. This is the context of my saying that depreciation does not matter.

IF OP consolidates everything into a HELOC AND
Continues to pay same monthly amount each month
THEN OP comes out ahead.

That his truck depreciated does not matter. The truck will depreciate regardless of a HELOC or a car loan. If at any point he is not able to meet his obligations, he can always sell the car and pay off the HELOC.

[MKKShah]

You will miss great memories with your kids? First of all, you can have great memories right now. The absence of a travel trailer does not stop you! If you need a travel trailer to make memories, then I feel sorry for you. Secondly, you will get no sentiment from me. I have seen my parents go from being dirt poor (doing things that you are considering doing), and I have seen them go to being well-off (doing things like what we are recommending here). I did not have much luxury as a kid, but I am proud to see my parents in a much better place today. I will not have to care for them financially as they get older because they are all set. And that is worth more than a $1 million in my mind! I would NEVER trade where my parents are today, for a childhood that I *supposedly* missed because my parents did not have cool things like a travel trailer.

You may be worried about missing out on great memories today, but there will be great memories to be made tomorrow. Wouldn't you want to pursue tomorrow's memories with dignity, as opposed to today's memories that will come with a burden? Wouldn't you rather go on vacations that did not follow you home? Wouldn't it be great to go out and enjoy life without you and your wife getting red-faced over finances?

We are not saying NEVER get a travel trailer. We are not saying that you should NEVER enjoy your money and have nice things. What we are getting at is that you should take a step back and think about what you are doing and how it will affect you later in life.

You make WAY too much money to be broke, and considering a HELOC, which is one of the worst inventions on the planet!

Sacrifice short-term gratification for long-term success. Don't do it the other way. Your kids will be appreciative in the end If you want to give your kids good memories, then how about the memories of being financially-wise: memories which will serve them well into the future.

I think we are way out of line telling someone what should or should not constitute enjoyment or memories. If a trailer is what will help OP make/keep memories then that is what it is. We have to take this at face value.

What we can do, however, is to counsel him on his affordability and the economics of the situation. Is it affordable or is it not and so on.

Taking a HELOC not equal to being broke.

The trailer is clearly within OP's financial limits IMHO.

[MKKShah]

Yeah and on the flip side, there is the possibility of a job loss, large medical bills, unexpected expenses etc. If you stretch yourself too much with monthly payments, there is a good chance that it will end badly for you, regardless of whether you can afford the payments or not.

Besides, investing your money carefully is a good way to ensure that your savings don't lose value over time. So, the depreciating value of money argument doesn't hold.

Yes.

- An EF should help cushion job loss.
- Medical bills (the ones that bankrupt people) are typically large enough that #450 a month will not make or break that situation. If THAT situation does happen, you might as well have enjoyed some luxuries along the way, since you are anyway headed towards bankruptcy.
- Again the EF should be good enough for unexpected expenses. If they are larger than that well..what can you do?

[dczech09]

I think we are way out of line telling someone what should or should not constitute enjoyment or memories. If a trailer is what will help OP make/keep memories then that is what it is. We have to take this at face value.

What we can do, however, is to counsel him on his affordability and the economics of the situation. Is it affordable or is it not and so on.

Taking a HELOC not equal to being broke.

The trailer is clearly within OP's financial limits IMHO.

Fair point. And I hope that the OP understands that I was not so much trying to TELL him what to do, but instead steer him in another direction. To help him understand the bigger picture.

When it comes to the counseling on affordability, it sometimes takes some passion and energy to drive up the importance of a message.

Maybe I listen to Dave Ramsey a little too much And we all know Dave's response to the OP would have been a bit more intense than mine.

Again I apologize to the OP if I came off a bit strong. I also apologize to you, MKKShah, for being a bit rash. I was not at all trying to undermine your credibility on this forum. I just get super fired up and energetic!

With that said, I believe the OP got some information and some advice to think about. And that is ultimately what the Saving Advice Forum is about.

[dczech09]

That his truck depreciated does not matter. The truck will depreciate regardless of a HELOC or a car loan.

That makes much more sense.

At first I thought you were saying that depreciation does not matter at all. But what you are really saying is that the depreciation of the asset is essentially "sunk" because it happen whether he is under a car loan or a HELOC.

We can agree to disagree with regards to whether or not the HELOC is a good idea. However, now I understand what you meant with regards to the depreciation.