Ask Money

Home equity line of credit

Chris Farrell Jul 29, 2009

Question: I have a $50,000 mortgage on my condo and was just approved for a $150,000 equity line of credit (no processing fees). I have no emergency funds and was planning to use the LOC to pay for major dental work (not cosmetic) I have been told I need – cost approx $10,000. I am financially very conservative and very uncomfortable with the idea of a second mortgage on my home – would I be better off canceling the equity LOC (I have 3 days) and charging the dental costs on a credit card? I have an excellent FICO score and don’t want to do anything to jeopardize that rating. Thank you! Annel, Norwood, MA

Answer: My strong bias is against borrowing against your home to pay for dental work. It isn’t just dental work. My general rule of thumb is that any money borrowed against the equity in a home should go toward improving the value of the place and your enjoyment from living there. I think your financially conservative instincts are spot on.

Here’s my overall perspective. It was commonplace during the great real estate bubble for homeowners to take out second mortgages to consolidate their debts, pay for vacations and meet tuition bills. It’s cheap money, right? The interest rate on a home equity line of credit is lower than the rate on credit cards. You also get to deduct the interest on your taxes. But treating a home like an ATM backfired when the boom went bust. Fact is, too many people needlessly put their homes at risk. For instance, credit card companies can’t go after your home if you miss credit card payments. But a lender can start proceedings on the home if you start skipping equity credit line payments.

Now, to be realistic you’re far from needing to worry about financial trouble. After all, the lender is willing to set up a very large line of credit with you so I know that you have a lot of equity wealth. The dental payment is comparatively small. You could handle it easily.

Still, I’d prefer that you pay for it on a credit card and then focus on eliminating that debt as quickly as possible. To me, it’s a better strategy and money habit. By the way, no matter what you decide to do your FICO score is fine.

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