There was a great response to my last Ask The Readers post: Parents Losing Home To Foreclosure!, so here’s another interesting question from one reader who’d like the input from other readers (yes, you!). It a variation of the old saving vs. paying down debt debate:
My wife and I were having a debate about savings as it relates to our home equity line of credit (HELOC). She has been brought up under the mantra of “always have at least 3 months of savings available,” which is fine by me, since I’ve always been a saver. Prior to getting the HELOC, we saw eye to eye pretty well. Now that we have a HELOC with about a $20k balance on it, I no longer would like to put any of my extra funds into a conventional “savings” account, but would rather use it to pay down the balance on the HELOC. To me, this is a game of interest rates — the HELOC is at 3.99% and the savings account is about 1%. I’m an IT guy who likes to see things in black-and-white whenever possible, and this is a case of that. As such, I’m willing to keep a ZERO (or negligible) balance in my savings account and just transfer funds from the HELOC account whenever we need money. I’m having a hard time selling her on this idea, though.
As I see it, I’d rather have $0 in my savings account and and $11k balance on my HELOC, whereas she’d rather have $9k in savings and a $20k balance on the HELOC. Even discounting the tax advantages of a HELOC, it seems like the higher interest rate accrued on the HELOC debt should override the low interest on savings. To me, it’s all one pot of money with differing interest rates. What’s your take? I’m sure this isn’t an uncommon circumstance.
The Liquidity Factor
This doesn’t directly answer the question, but I felt like one missing consideration is liquidity. Are home values decreasing in your area? How much home equity do you currently have? Unless it is a very high number, you may be in danger of having your HELOC frozen by your bank, which means you could be unable to borrow any more money at 3.99%. Many banks have been doing this recently.
If you were in the $0 in savings and $11k balance scenario and needed $1,000 to fix the car or more for some other emergency, what would you do without the HELOC? I am guessing that this is the situation that might worry your spouse, it would worry me!