I was tempted to take out a home-equity line of credit to pay for my son's college tuition. I'm glad I changed my mind. According to a recent article by Market Watch, homeowners with home equity lines of credit are struggling even as the housing market recovers. The American Bankers Association tracked 13 loan categories, finding that delinquency rates fell in all but two categories. Delinquencies rose to 1.91 percent from 1.85 percent for home equity lines of credit. The other rise was for mobile-home delinquencies. I can see why people are tempted to turn the equity in their homes into cash or credit, but we didn't want to get burned by taking money out of our four-bedroom "piggy bank."
Thinking about the long term
One of the reasons I considered a home equity line of credit is because I could make interest-only payments for the first few years of the loan. I liked the idea of having more cash flow. Still, I knew I'd eventually be socked with a higher monthly payment. I would never be able to pay off my home my money if I just got deeper in debt. Why would we get a second mortgage when we didn't even want our first mortgage?
Using our refinance savings
Instead of taking out of home equity line of credit, we decided to refinance our home at 2.75 percent. We could have done a "cash-out" refinancing plan, but our home is not a piggy bank or an ATM. We were able to lower our monthly payment from $1,200 to $900, which gave us more cash flow to pay for the college tuition and other bills. Since we refinanced to a 15-year mortgage, we didn't have to worry about having a mortgage in retirement.
Tapping our Roth IRA
Another reason we didn't end up using our home as an ATM is because we found better options. We decided to take money out of our Roth IRA to pay for college. We didn't have to pay any penalties because we had the Roth IRA for more than five years. We only took out the principal as opposed to any money interest or "profit." Although some critics say parents shouldn't sabotage their retirements by tapping retirement accounts for college, I don't agree. I have 25 more years to save for retirement. Once our mortgage is paid off in another 10 years, we will have even more to save for retirement.
As interest rates begin to rise, it's scary to think about what would have happened if we had taken out a HELOC with a variable rate. We didn't have to pay any money to tap our Roth IRA, but with a HELOC we would have had to pay an annual membership fee, application fee, settlement costs and transaction fees. Moreover, if we weren't able to repay the money we borrowed, we could have lost our home. I am glad we didn't use our home as collateral in a loan. As the value of our home continues to increase, our equity grows. But when it comes to a HELOC, I consider that ATM permanently out of order.
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