Question about using HELOC

**cardtrick** · 02-02-2015, 03:13 PM

Depends on how much you value that trailer. Is it worth going into debt for? Bankers will tell you whatever it takes to get you to take out that loan.

I would never borrow money to buy something I didn't need, regardless of the interest rates. You already have car loans at very high rates. I would instead focus on paying those off. What does your monthly budget look like? How much do you bring in and how much do you save?

**Random2k** · 02-02-2015, 04:57 PM

HHI is about $85,000 per year with about $22,000 between our savings account and my 401k. It may not matter much but I am in my early 30's.

We have owned a few trailers in the past and, when bought used as we plan to do with the next one, don't depreciate all that quickly. Over the last 10 years, the amount of value that I have lost on them has been less than what we would have paid for a vacation to Disneyworld.

Is it a smart choice to leverage the house to essentially reduce the interest rates on the cars even if I don't end up purchasing the trailer? There is no issue making the payments on the vehicles but a lower interest rate would help speed up the payoff process.

**Random2k** · 02-03-2015, 05:28 PM

Am I not asking this question properly or do I have everyone stumped?

**dczech09** · 02-03-2015, 05:54 PM

If I were you, there would be absolutely no way that I would do this (buy the travel trailer). Unless you can pay cash, you cannot afford it.

You already have quite a bit of debt that needs to be cleaned up. Especially that $38,000 car loan! No one can afford that type of car loan. No one! Keep in mind that the AVERAGE car payment in the us is $479 per month according to NADA; you clear that with flying colors (which is bad). You have over 5 years left on that loan and will pay over $6,000 in interest at your current trajectory. I would sell that car and downsize to a car that can be paid off within 2 years, or (even better) can be purchased in cash. I would do this in a heartbeat, no questions asked.

By doing this, you will free up $685 in monthly cash-flow which could buy you a travel travel if you were to save that up and wait a little while.

You could take out that HELOC and get a lower effective interest rate, however you are putting your house at risk. You probably worked hard to pay off house #2, right? Why on earth would you want to go back into debt?

If you want to become debt free, then going back into debt is a monumentally bad idea. If you are content with staying in debt, then do what you wish. However, if I were you, I would be looking at becoming debt free!

Just my opinion

**Random2k** · 02-04-2015, 06:23 AM

Originally posted by dczech09 View Post

If I were you, there would be absolutely no way that I would do this (buy the travel trailer). Unless you can pay cash, you cannot afford it.

You already have quite a bit of debt that needs to be cleaned up. Especially that $38,000 car loan! No one can afford that type of car loan. No one! Keep in mind that the AVERAGE car payment in the us is $479 per month according to NADA; you clear that with flying colors (which is bad). You have over 5 years left on that loan and will pay over $6,000 in interest at your current trajectory. I would sell that car and downsize to a car that can be paid off within 2 years, or (even better) can be purchased in cash. I would do this in a heartbeat, no questions asked.

Why do you say that "no one" can afford a $38,000 car loan? I make the payments pretty easily. This is actually a dually truck that I also use for work around my property. It is also intended to be the prime mover of the travel trailer. Downsizing is not an option.

By doing this, you will free up $685 in monthly cash-flow which could buy you a travel travel if you were to save that up and wait a little while.

You could take out that HELOC and get a lower effective interest rate, however you are putting your house at risk. You probably worked hard to pay off house #2, right? Why on earth would you want to go back into debt?

If you want to become debt free, then going back into debt is a monumentally bad idea. If you are content with staying in debt, then do what you wish. However, if I were you, I would be looking at becoming debt free!

As far as being debt free goes, I have nothing against it but it's not always on top of my priority list. Before these two vehicles, I was debt free (excluding home 1). As of now, my debt to income is about 2%. Pretty low in my opinion.

I suppose I could sit at home and save the cash for the travel trailer for the next 5-6 years but by that point, I will have missed a lot of great memory making opportunities with my kids.

Just my opinion

Thanks for taking the time to give me your opinion.

**LivingAlmostLarge** · 02-04-2015, 07:12 AM

I guess it's a little hard so I'll start by summarizing

Income $85k/year

Assets
cash/401k - $22k - is this your EF? What is your monthly budget/spending? How much are you saving now?
Home 1 $290k equity
Home 2 $???

Debt
Home 2 -$160k
Car 1 - $8.5k
Car 2 - $38k
CC $1100 - is this paid off monthly?

NW = $104.5k

How much is the travel trailer you want to buy? I would probably not buy it because right now you are carrying two homes and car loans. I think a fuller picture of the budget needs to be seen. But seriously you can't afford a $38k car. It's a big chunk of cash being tied up. And it's not about the monthly payment. That makes you poor thinking about things in monthly payments. You have to look at the big picture.

How is your debt to income 2%? Maybe I misread are you making $85k/month? Then yes. If not then your debt to income is not two percent. Your debt income with cars alone is 12%. Then add back the $160k mortgage and you are way above that.

But i don't think it's a good idea.

**disneysteve** · 02-05-2015, 04:38 AM

Originally posted by Random2k View Post

HHI is about $85,000 per year

Car #1 - Owe $8,450 - pay $225/month @ 9%

Car #2 - Owe $38,000 - pay $685/month @ 6%

You earn $85,000/year and owe $46,450 on your cars at high interest rates. And you now want to take on even more debt - using your home as collateral - to buy a toy. With all due respect, are you nuts?

Seriously, rule of thumb for buying a car is for the payments not to exceed 10% of your monthly income for no more than 3 years. Your current payments are probably around 17% (85K gross, probably around $5,300/month net after taxes). You can't afford the cars you have. The last thing you need is to take on new debt.

You should never finance luxuries. If you can't afford to pay for them in cash, you can't afford them.

my debt to income is about 2%

You might want to check your math. Maybe you meant to type 20%, though it's higher than that too.

**HappySaver** · 02-05-2015, 05:04 AM

The fact that your interest rates are so high indicate you may not have the best credit. You should focus on cleaning up your debt before you acquire more.

I actually don't think it's a bad idea to take out the HELOC in a small amount, but only IF you have the willpower not to use it for the trailer. You should then use it to pay off the loan at 9%. I wouldn't put too much on the HELOC at once since the rate is adjustable and it can go up. Throw everything at it and work on paying that off. Once you do that, you can focus on car #2. Use the HELOC to improve your interest rate on existing debt, not to take on additional debt.

After the cars are paid off you can save towards and pay for the trailer. A used one shouldn't cost that much. Don't put it on the HELOC. In the meantime, camping is a great way to make memories. Remember that you've made your choice by purchasing a $40k car. If that's your priority, that's fine. Just don't tell yourself you "deserve" the trailer or "need it to make memories".

That said, I'm hesitant if you should take the HELOC out at all. It's the smart thing to do to lower your interest rate, but can be dangerous and you really need to have the willpower not to use it other than to pay down existing debt.

**MKKShah** · 02-05-2015, 09:12 AM

I don't agree with the "unless you can pay cash for it you cannot afford it" theory of personal finance for things like Acquisitions. It may make sense say for a vacation (even there I think borrowing may not be a bad idea in some cases. One example, your kid is at the right age where a trip to Disneyland would be memorable. You don't have cash, and if you get a reasonable financing offer, I would say go ahead!). You can borrow, as long as the repayment is within your income, have a reasonable EF, and a strategy to offload the acquisition (trailer in this case) if thing so south.

Moving the auto loan debt to a HELOC is a great idea. You save money, and can even get a deduction in taxes for interest paid on a HELOC. The only case where the depreciating nature of this asset comes into picture is if you anticipate filing for bankruptcy or a scenario where you foreclose on your home. Even in the latter scenario a HELOC makes sense.

**dczech09** · 02-05-2015, 11:43 AM

Originally posted by Random2k View Post

Why do you say that "no one" can afford a $38,000 car loan? I make the payments pretty easily. This is actually a dually truck that I also use for work around my property. It is also intended to be the prime mover of the travel trailer. Downsizing is not an option.

You will pay over $6,000 in interest during the life of that loan. You could buy a used car for that amount! Not to mention you saddle yourself with that $685 monthly payment for 65 more months! All for a machine that is literally going down in value as we speak.

You could very easily downsize to a truck which is far more inexpensive and just as reliable. That car of yours is not special (although the dealer might have made you believe it is. There are many other vehicles that can do what it can do.

If downsizing is not an option, then I suppose you must be alright with making car payments your entire life? Think about it... What happens once that car meets its maker? You are going to take out another car loan for $685 per month. Then you will do it again, and again. You are on a payment merry-go-round!

And do not tell me that you are going to save up for a new car once this one dies. You do not have the cash flow to do so. How do I know this? You would not be considering a HELOC otherwise.

If you were to instead invest that car payment of $685 per month for 30 years at an average return of 8%, you would end up with $1,020,896! Unless you are a secret millionaire, you cannot afford that $38,000 car in the long-run. It is literally costing you over $1 million (when you consider opportunity cost).

I sincerely hope that you consider the long-term ramifications of this car loan. I, as well as others here, want you to win. And you are not on a path to winning right now.

Originally posted by Random2k View Post

As far as being debt free goes, I have nothing against it but it's not always on top of my priority list. Before these two vehicles, I was debt free (excluding home 1). As of now, my debt to income is about 2%. Pretty low in my opinion.

I suppose I could sit at home and save the cash for the travel trailer for the next 5-6 years but by that point, I will have missed a lot of great memory making opportunities with my kids.

Do you realize what you are saying? You are saying that you would sacrifice a lifetime of financial well-being for a short-term of luxury. You would be willing to go BACK into debt on a house that you own? You are willing to keep a $38,000 car loan despite the hidden price-tag of over $1 million?

Your debt to income ratio is quite high, actually. On your cars alone, it is over 12% (considering gross income) which is WAY too high! You have too much money tied up in cars.

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.

**dczech09** · 02-05-2015, 11:58 AM

Originally posted by MKKShah View Post

Moving the auto loan debt to a HELOC is a great idea. You save money, and can even get a deduction in taxes for interest paid on a HELOC.

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.

Originally posted by MKKShah View Post

The only case where the depreciating nature of this asset comes into picture is if you anticipate filing for bankruptcy or a scenario where you foreclose on your home. Even in the latter scenario a HELOC makes sense.

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?

**disneysteve** · 02-05-2015, 12:11 PM

Originally posted by MKKShah View Post

I don't agree with the "unless you can pay cash for it you cannot afford it" theory of personal finance for things like Acquisitions. It may make sense say for a vacation (even there I think borrowing may not be a bad idea in some cases. One example, your kid is at the right age where a trip to Disneyland would be memorable. You don't have cash, and if you get a reasonable financing offer, I would say go ahead!).

I don't think you're going to find much support for this view around here.

Moving the auto loan debt to a HELOC is a great idea.

I think this can be true for someone who is disciplined and responsibly handling their finances. I don't get the sense that that's the case for the OP. One way that people get in trouble transferring debt to a HELOC is they end up taking 5 or 7 or 10 years to repay what was originally a 3-year loan. Rather than a HELOC, a better option may be a home equity loan with a fixed interest rate and a fixed term. That prevents the borrower from dragging it out indefinitely. It also avoids having the temptation of that open line of credit.

Most people who use their home equity to pay off consumer debt are back in consumer debt within a year or two. They pay off their cars and their credit cards and before you know it, they've charged up the cards again and now have both those bills and the HELOC to deal with. A lot of people lost their homes that way when prices went south in 2008.

**cardtrick** · 02-05-2015, 03:16 PM

I'm not as debt averse as some folks here, so I will give you a slightly different opinion.

1. I would do a HELOC or a cash out refi (in your case take out a mortgage) to pay off all the higher rate debt. Do take into account the origination costs though.

2. I would also take out the HELOC/mortgage (I prefer fixed rates and HELOCs are mostly variable) if I reasonably felt that I could make more money investing.

3. I would never go into debt to buy something that was not a necessity.

4. Being in your 30s, you're not doing too badly with your finances, but you're not way ahead either.

5. In the end, if you really value that trailer a lot (and you get quite a bit of use out of it), I would go ahead and buy it. Life is short. I would just go over my budget and see if I can cut anything else to make up for the trailer payments. : )

**MKKShah** · 02-05-2015, 03:34 PM

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.

Question about using HELOC