Given the rising interest rates, if you have been using your HELOC (Home equity Line of Credit or Secured Line of Credit) for investing or for debt payments, here are 3 solid ideas to do with that account.
- Reduce the principal
- Pay it Off
- Close it
With interest rates rising, paying off debt has now become a solid investment plan. It will pay upwards of 4% in this situation (as of May 2022).
1. Reduce the HELOC Principal
If your HELOC rate is at 4.5%, every dollar you pay to the principal saves you 4.5%. That money stays in your pocket, so it can be used for other things, and it is risk-free. This makes it an excellent investment.
This gem has disappeared for a long time, due to very low-interest rates. With rates now going up, paying off debt is a good investment, again.
2. Pay it Off
This fits in nicely with the Debt is Bad view that I have. This is also a follow-on to (1) Reduce the Principal. Having no debt creates so many choices and options in your life. You can then invest the money you were paying off the HELOC principal with.
3. Close It
This assumes you have achieved (2) by paying the line of credit off. Why close it?
- One less thing that is vulnerable to identity theft or fraud
- Helps with FOMO, you will spend with less impulse with less to spend with
- One less thing for your bank to charge you service charges on
I am confident many financial planners will poo-poo this perspective. I have always found borrowing to invest a risky thing to do, but paying off debt is never risky. You could put that money in a HISA for the moment until you decide what to do with it.
A Heloc like the Manulife One can be useful. I was going to sell my house in 2020 just before the Covid-19 virus hit. I was using it as a reverse mortgage to supplement my low retirement income. If I had sold I would have had no debt and a lot of money in the bank. And no where to live of course. That idea got put a hold when Covid 19 hit but the Heloc let me draw on that for living expenses so I just stayed where I was and paid about 12,000 in interest over the two years. My house appreciated by about 600,000 over that period – tax free – at an interest cost of 2% of that appreciation. Yes it was pure luck.
It is principal! Principle means a moral value or a rule you establish for behaviour etc.
Just retired and I find the HELOC a nice thing to have as an emergency fund alternative. Allows me to keep more funds invested but I am still able to make some emergency purchases without directly using my savings.
I would only do this if I had enough funds invested to allow this approach!
I use our HELOC like the ManulifeOne account except I just do it myself! Has worked great over time….
I have kept an unused heloc open for the opposite reason to your comment on possibly being hacked. There have been cases of fake mortgages being taken out on mortgage free properties without the real owner’s knowledge. I’m told that having a heloc means I will be informed before any mortgage can be registered. Could be an urban myth?
Not sure about the being informed, but you have minimized the mortgage that can be taken based on the limit on the HELOC. Hopefully the bank will inform you if someone attempts to put a lien on your property, but, sometimes banks don’t think that is needed too.
As far as I know with the HELOC being attached to the house gives the bank first dibs on any debt or refinancing. So, at least in principle (hope I got it right this time), they will want to talk with you about any re-financing.
Plus in my case I had to inform the insurance company of the lien the bank holds on the property through the HELOC. I would think that even if the HELOC is at $0 as long as the HELOC is open then the bank has a say.
So if the property is sold the HELOC has to get cleared before you can touch any money from the sale..
RICARDO
That sounds right to me, but then again I can’t figure out if the Principal is always your PAL or not….
While I’ll agreed with the basic premise that debt is not something to be complacent about, not all debt is “bad”. Best example is a house purchase with the caveat of not overpaying for the house and stretching your credit limit’s ability to be paid back.
I have run a HELOC for several years with these low interest rates. At present the dividends 1) pay for the HELOC interest and 2) pay down the principle.
What I do look at is the differential between the HELOC interest (tax deductible) and the div pay out.
In my case the interest is $1.75K and divs were $4.02K for 2021. so a positive balance of around $2.3K to pay down the principle which of course entails less interest in the following year – if things were to stay the same (which they are not). What a lot of people might not take in to account though is that the $2.3K of “profit” is taxable as dividends so it is not, so to say, clear profit. The $2.3K may be more like $1.8K once you take in to account your tax rate.
Not finished yet either. If you are just borderline for the OAS clawback the resulting “profit” might just be enough to push you in to clawback territory. So then you lose a bit more to the clawback.
So, in theory your $2.3K might be more like a $1.5K profit and not the $2.3 that appears on paper.. Still profitable but not as much as it appears at first glance.
RICARDO
People who are told to borrow money to invest that cannot afford it, should not invest.
Better question, is it principal of the loan or principle of the loan?
Both seem to be used, and I usually get it wrong.
It’s the principal (AL) of the loan. To remember which is which, follow that two-step process.
1. Do you need a noun or an adjective (a qualifier)? If you need an adjective, pick the one with an A in it (as in Adjective). E.g. the principal affair, the principal theme of a play.
2. If you need a noun, then remember this: Principle, which ends in LE, is a form of moral or general rule – and rule is a word that also ends in LE. The two LE-words go together: principle and rule. If you’re not talking about a rule, but a person or a thing, then it’s going to be Principal: the principal of a school or a firm, or of a loan. So we can say, “In principle (as in ‘as a general rule’), the principal of the load must be paid as fast as possible.”
I find the LE mnemonics more effective than the one about the principal being a pal. That one works for the principal of a school, but not so much for a loan. Also remember the first