HELOC: now or later?

July 18, 2006 9:27 AM

Home equity line of credit: should I get one now or later?

I'm going to buy a new car, and I'm going to pay for it in cash. A portion of that cash was saved for long-term ongoing home renovation projects. My plan is to restore the renovation fund by paying the equivalent of a car payment every month, with an eye to repaying the "loan" to myself in 2-3 years.

By my projections, we wouldn't run out of cash for renovations for another 6 months or a year (or maybe even longer), but you never know when you're going to run into an expensive problem when you are renovating.

My question is, should I take out a HELOC now, before I buy the car, to ensure that a reserve fund is immediately available should renovations go quickly or poorly? Or should I wait until we are really out of cash before taking out a HELOC? I would not use the line of credit if there is cash available to cover renovation expenses, so it would hang around unused in the interim.

posted by crazycanuck to Work & Money (8 answers total)

I sold mortgages for a while, a few years ago. I know there are tons of people around here who will have more experience than I do, so listen to them if they contradict what I say.

That said, it's generally better to get a line of credit before you need it. You can take the time to shop around, see what's out there, and get everything done at your own pace. If you wait until you need it, you're going to feel rushed and might not have the opportunity to find the best deal that you can. And if a true emergency occurs, it'll be ready and waiting for you to use.
posted by voidcontext at 9:36 AM on July 18, 2006

I'd recommend getting the HELOC before buying the car while your finances look their best on paper. You'll know that you paid cash for the car, but that won't help you much when getting the HELOC. Do it while the cash is stillin the bank.

If thats not practical, do it before you've gone through your renovations reserve.

For the HELOC's I've looked at, there is no negative to having the loan but not drawing down from it. It just sits there giving you peace of mind and costing nothing :)
posted by AuntLisa at 9:53 AM on July 18, 2006

I don't have any experience specific to the HELOC but I do have a regular LOC and I agree with AuntLisa that now is the best time for you to apply for any LOC with your finances at their best.

At the time I applied for my own LOC, I had gone into my branch to discuss a regular car loan, but the manager I spoke to suggested that I try for a LOC instead after going over the different options and looking at my credit history.

I was approved and thanks to more generous loan terms from the BOM (Bank of Mom) ended up not having to use the LOC for my car purchase after all. Now I have a LOC available if I should ever need it, which might have been more difficult for me to apply for in future given that I will soon be assuming mortgage debt for my condo.
posted by phoenixc at 10:22 AM on July 18, 2006

Just a note on using the HELOC to buy a car: Think twice. You LIVE in your house. It's important. The only time you should use that equity is to improve your property in a way that it gains value.
posted by cccorlew at 10:48 AM on July 18, 2006

There was an earlier AskMe regarding home equity loans. Overall, the consensus was that putting your home on the line was a bad thing. This is especially true if you are doing it to buy a friggin car.
Dire medical emergencies...maybe. To buy a car? Nope.
posted by Thorzdad at 10:57 AM on July 18, 2006

Oh please. It depends on the stability of your finances. If you're paycheck-to-paycheck, up-to-your-ears in debt and one step ahead of the baliff, yeah, don't risk your home on a variable-rate HEL for anything as ephemeral as an automobile.

But if you're in good shape - and since one option is buying the car outright with cash, you probably are - go ahead and HEL it. That way you can (probably) deduct the loan interest.
posted by mojohand at 11:31 AM on July 18, 2006

Assuming you're not looking to sell this home anytime soon why finance the renovation expenses at all? Some issues obviously have to be resolved immediately for the sake of livability or preventing continuing damage but many renovations do not. Those you can wait till you're done repaying yourself

I realize that might not be attractive but since you're making the smart choice and choosing not to pay interest on a deferrable purchase you're obviously interested in saving money. In that same in-a-perfect-world vein you should have a cash emergency repair fund that's independent of your renovation expenses - fixing a broken water heater isn't a renovation expense, it's a living expense.
posted by phearlez at 12:19 PM on July 18, 2006

Response by poster: phearlez: you're getting to the real issue. I don't want to finance the renovations at all if possible. However, we are expecting our first child and it would be preferable for my husband (who is working alone, full-time on the renovation project) to complete the renovations before my maternity leave ends and he has to take over full-time child care duties. I want him to have the flexibility to complete the renovations before he has other pressing responsibilities. By the same token, we might not need the HELOC at all if work goes slowly, we encounter no unexpected problems, and he runs out of time to do work before maternity leave ends.
posted by crazycanuck at 12:35 PM on July 18, 2006