The Power of "Good Debt"
Debt is the wealth killer. You've heard this piece of advice repeated in a million different corners of financial news. You've read articles telling you to get rid of all your debt in order to build wealth and save for the future.
There's one very notable exception, and you're living in it. Debt secured by your home often carries low interest rates, and regular payments can do wonders for your credit score. In some cases, you may also qualify for tax-deductible interest, but only if the funds are used to buy, build, or substantially improve the home securing the loan. Consult your tax adviser to understand what applies to your situation.
Why Mortgage Debt Is Considered "Good"
Money you owe on your home is often called "good debt," and there are a few ways it's different from other kinds of debt:
- It's secured. Your ability to repay the debt is backed by the value of the property.
- It benefits from appreciation. Your home will likely increase in value over time, real estate has appreciated roughly 3–5% per year on average nationwide, though this varies by region and time period. So instead of losing your money, your mortgage simply reduces your investment income.
- It strengthens your credit. Creditors view installment loans, like mortgages, as signs of responsible credit use. A consistent repayment history also looks very favorable to potential lenders and credit scoring entities.
What Is a HELOC?
If you've already paid for your house, there are still ways to reap the benefits of this "good debt." One of the most popular options is a home equity line of credit (HELOC), a flexible borrowing tool that allows you to use your home's equity to cover various expenses.
There are a few key differences between a HELOC and your original mortgage:
- Potentially lower rates: Because HELOCs are secured by the equity you already have in your home, lenders may charge less interest than on unsecured debt. Keep in mind that HELOCs typically carry variable rates, meaning your rate can change with market conditions.
- Flexible payments: Many HELOCs offer a grace period of interest-only payments, allowing you to pay smaller amounts each month for several years, depending on the loan's terms.
The Risks to Keep in Mind
HELOC loans are not risk-free. You're securing your purchases with your home, which means if you don't make your payments, you can face serious consequences: losing your home, damaging your credit, and still being liable for the loan balance.
Like all debt, a HELOC is a serious financial instrument. You should have a clear reason for using it, and a plan for paying it off.
Smart Ways to Use a HELOC
If you're interested in getting a HELOC, Climb can help. Here are a few smart ways members use their HELOCs to improve their financial well-being:
1. Financing Home Improvements
This is the most common reason for using a HELOC. It makes sense, improving your home increases its value, making it a low-risk investment. Using your home equity to finance upgrades is often the most affordable way to boost your property's worth.
2. Debt Consolidation
If you have a lot of "bad" debt, such as credit cards, car payments, or other high-interest loans, you can save money by paying them off with a HELOC. You'll enjoy a lower interest rate and make just one payment per month. Note that HELOC interest used for debt consolidation is not tax-deductible under current IRS rules, tax benefits only apply when funds are used to improve the home itself (consult your tax adviser for details).
3. Purchasing a Car
Unlike your home, your car will depreciate in value. That's why auto loans usually carry higher rates than HELOCs. Buying a car outright with a HELOC can help you secure a lower overall price and avoid dealer financing fees.
4. Funding Major Purchases
For most people, their home is their biggest source of wealth. If you need capital to start a business, purchase a boat or RV, or invest in rental property, a HELOC can be one of the most effective financing options available.
5. Covering Emergency Expenses
Financial experts recommend keeping an emergency fund that covers six months to a year of expenses. If you don't yet have that savings cushion, a HELOC can act as a temporary safety net for unexpected costs like medical bills or car repairs. You should still aim to build your savings to avoid borrowing in a true emergency, but a HELOC can provide valuable peace of mind in the meantime.
The Bottom Line
If you own your home and are considering any of these options for your future, we can help. Call or stop by today to speak with one of our friendly, knowledgeable representatives, we'll answer your questions and help you decide if a HELOC is right for you.
Turn home equity into opportunity.
Whether it's renovating your home, upgrading to your dream backyard oasis, or finally taking that long-awaited vacation, our HELOC provides the flexibility and convenience you need. Apply online or call us at 303.427.5005.
- HELOCs as low as 6.25% APR*
- $350 in closing fees waived
- $200 in cash
*APR = Annual Percentage Rate. Not all will qualify for the lowest rate. Rates are variable with a maximum rate of 18.00% APR. Fees for appraisal, title insurance, flood hazard determination, and recording charges may apply. Property insurance is required. The estimated aggregate of credit union and third-party fees range from $115 to $1,900. Closing costs vary and average $301.
