REAL THINGS - by Tara Wills

HELOCS... The Good and the Bad

Home Equity Lines of Credit, or HELOCS can be a great tool to enable homeowners to update or repair their homes. A homeowner is able to get a loan, based on the value of their home, using the equity that has accumulated as collateral for the loan. This can be a nice option when you don’t have the capital to get work done to your home, and don’t want to lose the interest rate that you got on your home loan. It’s also nice, because you can get interest only loans, where your monthly payment is only covering the interest on the loan, and not the principle that is owed. This can be helpful in emergencies but is a potentially dangerous path to take if you’re not careful.

Back in 2004, before I became a Realtor, we fell into this dangerous trap. We’d just had our home built, and needed to have additional work done to it. At the time, the market was still HOT, and we had over $100,000 in equity that had accumulated as our home was being built. Several different people told us that we should get a HELOC. They explained that it was like borrowing money from ourselves, and that the payments were low, and we could always just make interest payments for a while. We were also told that as long as we refinanced before the principle payments started, we could keep the payments manageable. Since much of our initial plan was to make upgrades to the house, thus increasing its value, it seemed like a no-brainer! We got the loan, added a loft, and did a few other things around the house. By then, I’d decided that I wanted to be an agent and signed up for classes. As we watched the market continue to go crazy, we were sure we’d be rolling in the dough as soon as I finished my classes. We foolishly took more money out of our equity and treated ourselves to a few things that we wanted and couldn’t afford, including a Cadillac SUV! Yep, we’d officially lost our minds! We’d never heard of Dave Ramsey, had no financial literacy training, and obviously listened to the wrong people.

Eventually, I took the classes necessary to earn my Broker’s License. In doing so, I started to realize that using the equity in our home as a charge card was a terrible idea. And as I started my career as a real estate agent, the market began to decline. My first year was pretty good, but I was going to need to make much more money in order to tackle that HELOC before the principal payments kicked in. Before we knew it, the housing market crashed, and the house with constantly increasing equity was worth less than we now owed. This meant that we couldn’t refinance at a lower interest rate. The declining market also meant that homes were selling for much less money and taking longer to sell, as short sales and foreclosure sales became the norm. It was a mess! We sold my beautiful SUV and got a more practical one, hunkered down, and weathered a pretty long storm. We were luckier than most that had gone down this foolish path: we were able to keep our home. But years later, we’re still dealing with the repercussions of those poor decisions. We finally have equity in our home again, but when we were finally able to consolidate the loans, we couldn’t get the best rate because we were paying off the HELOC. Additionally, the new loan will take five more years than the original to pay off. That translates to so much money lost.

I share this story because I want to help others avoid the mistakes that we made, the mistakes that many people made back then. So many people lost their homes because they bought cars, jet skis, and other “toys” using the equity from their homes. Others used their equity to build new homes, hoping to sell them for a profit. For many, it worked… until it didn’t. I showed several brand-new homes that were short sales, all owned by the same person. HELOCs can be life savers, if used carefully and correctly, but we never really know when a market is going to change. Be smart when dealing with the equity of the home that you live in.