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Ask Money

A HELOC?

Chris Farrell Nov 23, 2009

Question: I recently paid off my mortgage ($55,000) and consulted with my local bank about how to best invest discretionary funds now that mortgage is paid. Bank’s financial advisor, no fee, advised me to take out a HELOC, home equity line of credit, for the maximum available b/c interest is low, prime plus 1% and it is a good thing to have in case of an emergency. I am 67; taking my SS benefit, working two part-time teaching jobs as adjunct faculty; total annual income I currently about $50 thousand. I am reluctant about having any kind of lien against my house, have no need for additional cash at this time, have about $10 thousand in easy to access cash assets right now. Please advise if HELOC is a wise decision; I have not yet signed at a closing. Pamela, Providence, RI

Answer: Congratulations for owning your home free and clear. It must be a nice feeling. It’s certainly a financially savvy move to be done with the mortgage. I don’t get the advice. If I were you, I would invest your discretionary funds in Treasury bills and notes, savings account and CDs, I-bonds, and similar safe parking places for money. Why not build up your savings?

Yes, a home equity line of credit is something of an emergency safety valve. But savings is even better. I’d focus on savings rather than borrowing. The former benefits you; the latter the bank.

Now, if you do decide to take out a HELOC out I would not go to the maximum amount. That’s creates the possibility of falling into financial trouble. At most I’d take out a small one, again, just to smooth you over in a pinch.

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