261 |"Nothing Gold Can Stay" | What is a HELOC?

After 18 years of ownership, Brad says goodbye to his beloved Honda Civic, Golden Boy. When it comes to car ownership, ChooseFI often talks about only buying a new car every 15 years. Over a 45 year adult lifetime, the savings, when invested, can amount to almost $750,000 when compared to someone who leases or just manages a constant car payment. Although Brad wanted to keep the car, it had been having some mechanical issues and his family was no longer comfortable riding in it anymore. The impact it was having on Brad's family was not worth it. For his next vehicle, Brad opted for a 2013 Honda Civic rather than a brand new car. He purchased his new Civic through Caravana, the car vending machine business, who was selling Civics for roughly $3,000 less than CarMax. The buying process through Caravan was quick and streamlined. The car was delivered to his home and he spent approximately one-hour signing paperwork and finalizing documents. There are sweet spots when purchasing used vehicles. Although Brad's car is seven years old, after five years, cars have generally already depreciated at the fastest rate. If you are going to buy new, keep it forever. If you buy used, target 5-7 years old. Listener Oscar wrote into the show asking about Home Equity Line of Credit (HELOC) which hasn't been something that ChooseFI has discussed much in previous episodes. A HELOC is a revolving line of credit on your home where the equity you have in your home is used to secure it. For instance, a home worth $300,000 with a mortgage balance of $100,000 has $200,000 worth of equity. A HELOC allows homeowners to tap into the equity locked up in their homes. An advantage of using a home equity loan over other options for access to cash, like credit cards, is that the interest rate is often much lower, although it is a variable rate and can change. The interest rate on a HELOC may be in the 3-5% range versus 15-30% with credit cards. For homeowners who placed a sizable down payment on their home, whose home has appreciated, made extra payments, etc., a HELOC becomes a potential source of low-interest revolving credit. A HELOC is different from a home equity loan in that with a loan, the loan amount is deposited into your bank account and interest begins accruing immediately. A HELOC provides you with the ability to tap into the equity at any time, such as in the case of an emergency. No interest accrues until you decide to access the money. It gives you options if ever needed. Occasionally, HELOCs can be had for no closing costs. Considering that the process to apply and be approved for a HELOC can take weeks, it can be useful to have one in place so that it is already available if and when it is needed. Frequent guest and friend of ChooseFI, Big ERN, does not have an emergency fund. He believes that there is an opportunity cost to keeping 6 months of expenses in a liquid account that is likely earning every little in interest. In a thought experiment, he tried to envision a true emergency that he could not cover with credit cards or a HELOC. Those working to build an emergency fund before beginning to invest are potentially missing out on higher interest rates earned from investments. They might be better off investing their savings and using money from a HELOC to cover monthly expenses in an emergency rather than selling off investments or using high-interest credit cards. Jonathan mentioned that there are schemes to paying off a mortgage early using HELOCs and credit cards that people can learn about for a fee. Brad doesn't doubt that these might work, but it's too complex. There's no insider knowledge worth paying for. He doesn't believe these methods are any more beneficial than making additional principal payments to a traditional mortgage. Rather than a HELOC, Jonathan uses a margin loan through M1 Finance for a line of credit. He can borrow up to 40% of his invested assets with an interest rate of 2.75-3.5% and have the money in his account in minutes. Margin loans on investment accounts are lines of credit options for renters. Listener Alex wrote in with his win with a High Deductible Health Plan (HDHP) and Health Savings Account (HSA). Listener Rachel wrote in saying that she has reached FI and didn't even know it. As a result, she was able to leave a toxic work environment in the middle of a pandemic and spend more time with her nice and nephew. FI wins read on the show win their choice of one of ChooseFI's books so keep them coming! Listeners Brian and Deb maxed out their 401Ks this week before their contracts ended to take full advantage of the company's match and on Oct 23 will officially be financially independent. RESOURCES MENTIONED IN TODAY'S CONVERSATION Learn about ChooseFi's 3-card $1,000 cashback credit card strategy ChooseFI Episode 022 The Ultimate Guide to the True Cost of Car Ownership Get a fantastic term life insurance policy at a fantastic price with PolicyGenius Earn a high-interest rate on your savings account with CIT Bank ChooseFI Episode 066 The Emergency Fund…Is It a Bad Idea? Read DoughRoller's article, Can You Really Pay Off Your Mortgage Early with a HELOC? ChooseFI Episode 009 Travel Rewards: How to Travel the World for Almost Free (The Easy Way) Sign up for ChooseFI's FREE travel rewards course Learn more about M1 Finance here Sign up to receive Brad's newsletter, The FI Weekly IF YOU WANT TO SUPPORT CHOOSEFI:

 

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