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  • Writer's pictureGalia Gichon

The Temptation of HELOCs

With interest rates around 4%, you may be tempted take out a home equity line of credit (HELOC)—and not just because it’s cheap.

Given the dicey real estate market, you may need to make repairs you’d hoped to avoid by selling—or you may want to do some upgrades to attract buyers.

It’s a tough choice. Even if you can afford it, borrowing equity means more debt. But you could stand to gain in the end. Here’s how to think it through:

Remember that you need to have at least 20% equity in your home to qualify for a line of credit.HELOC rates are variable—which means that they’ll go up when interest rates rise. So what seems like cheap credit now, may not be in two years.Renovations don’t always recoup their value. The average cost-to-value ratio for 2011 is only 60%. So if you borrow $30,000 for a kitchen reno, you could get about $18,000 when you sell your house. A $12,000 loss!Retirement is a better investment. A $30,000 HELOC at 4.3% would give you a monthly payment of at least $308. If you were to invest that $308 in a ROTH IRA earning 5% annually (yes, that’s possible today, see PTTDX or PRPFX), you would have almost $50,000 in 10 years, versus negative $30,000.

When you add it all up, what’s wrong with simply going old school and—wait for it!—saving for repairs and upgrades? If you stashed that $308 a month for the next two years in 1% savings account, you would have nearly $7,500. And no debt.

You owe it to yourself. How much home equity debt do you have now?

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