Do you want to pay off the HELOC loans that you have? How would you go about doing this? Would you pay it off with a credit card balance transfer? This exact question was posed to the experts at Fox Business news.
What is a HELOC Loan?
Before we get into that specific question and its answer, let me explain exactly what this is for those who might not know. HELOC stands for Home Equity Line of Credit. Home owners are allowed to borrow money from lenders using the equity that they have built up in their home as collateral. So for instance, if you have a home that’s worth $300,000 today and you have equity of $100,000, you can borrow against that $100,000. The equity is based upon current valuation. It is not solely based upon how much money you have put into your house. So let’s say you bought that house 20 years ago for $150,000 and made a 20% down payment of $30,000. Over the past 20 years, the value of the property has increased substantially. The difference between how much money you own on your property and what the property is worth is your equity. HELOC loans are commonly referred to as secondary loans. You may have heard someone say, “I took out a second on my home.” That means that they borrowed money via a HELOC from the equity that they have in their home.
Paying off a HELOC Loan
Like a primary mortgage, you need to make payments on your HELOC loan to pay it off. So the question is, would you use a credit card to pay off your HELOC loan. Before you immediately say no because the interest on credit card debt is much higher than the interest on HELOC loans, what if I told you that you could transfer the money interest and fee free? Today, many credit card companies are offering zero fee balance transfers that also don’t incur any interest charges for one year! You could have a one year, interest free loan. So if you transfer your HELOC to one of these no fee balance transfer credit cards, you can get one year of no interest. So would you do it? Let’s see how the folks at Fox Business answered this question. Here’s the article from Fox Business that considers this exact situation:
Dear Debt Adviser,
Hello, my husband and I have excellent credit scores and are very fortunate not to have any credit card debt. We do have a mortgage left of $58,000 and a HELOC loan of $7,500, which I really want to pay off. I have received a balance transfer offer of 1% balance transfer fee for 12 months at zero percent interest. Does it make sense to use one of the checks to pay off the HELOC, with rates of 2.99% and 5.62% with this offer? I think it does — we also do have a six-month-plus emergency fund. Thanks!
- Kristen
Dear Kristen,
You and your husband do not have any credit card debt because you have managed your finances well, which makes you fortunate, but it’s no accident. Being without credit card debt is not something that someone lucks into, it is a result of advanced planning and most likely a few sacrifices along the way. And for that, you and your husband are to be congratulated.
To answer your question about paying off your HELOC loan with a balance transfer to a zero percent interest credit card, I would encourage you to take a big-picture look at your finances now and your future financial goals. To pay off your $7,500 balance plus the $75 balance transfer fee in 12 months, you would need to pay $631.25 per month. I’m not sure how that compares to your current monthly HELOC loan payment, but you will need to be sure the $631 payment will not cause any problems in meeting your expected monthly obligations.
You have a hefty emergency savings account, but I would feel better about it if the account held 12 months of living expenses rather than six. I know several people who have been unemployed for more than six months in today’s rotten economy. Having a year of a cushion is what I recommend. Plus, the 12-month stash would line up nicely with your 12-month repayment option from the nice people at the credit card company.
There is another matter to consider. What if, for some reason, you are not able to pay the entire balance before the zero percent interest rate offer ends after 12 months? The interest rate would obviously increase to more than what you are currently paying on your HELOC loan.
I recently bought a new mattress. They offered me 24 months to repay at zero percent interest. My response was “no thanks” because this sounded like 24 chances to make a mistake. One missed or delayed payment hiccup, and my interest rate would have been goosed to Herculean proportions, and my interest savings would have evaporated before my eyes.
Your HELOC already has a very low interest rate. Plus, the interest may qualify for a tax deduction, making your rate even lower. For long-term consideration, I would recommend that you continue to add to your emergency account and review your retirement and any other long-term financial goals before restructuring your debt with a balance transfer. It may make more sense to make a larger contribution to your retirement, college, vacation, etc., funds than to pay down your HELOC. The beauty of having a financial plan is you get to manage your money rather than letting it manage you. And keeping your finances simple is always a great management style.
Whatever you decide, keep up the good work.
Good luck!
Did you agree with FOX’ suggestion? We think that the advise offered by FOX Business is quite sound. The interest rates that you are paying on your HELOC loan are likely better than the interest rates that you will need to pay on your credit card if you eventually would have to start incurring those fees. If you want to pay off a HELOC loan, make sure that you can accomplish it comfortably, but it is probably more important to pay off any credit card debt first.
