Summary: A homeowner is having repairs made to her home costing a large amount of money and considering using the equity in her home instead of cash. The cash can be used to make the repairs and an equity loan or line of credit can be open for emergencies. It makes more sense to use cash earning little interest than to take out a home equity loan at a much higher percentage.
Q: We're having much needed repairs done to our house, and it will cost about $10,000.
Although we could pay for this in cash, we were saving the cash for private school tuition for our two children and for emergencies. We have been told that taking out a home equity loan (HEL) or home equity line of credit (HELOC) are two good options. What do you think?
A: I don't believe you should use up every spare bit of cash you have for emergencies, but if you do have cash that's sitting around earning 1 percent interest, why would you borrow against your home and pay 7 to 8 percent interest?
The smart thing to do would be to use the cash you have to make the repairs, but get a home equity line of credit for your house. You shouldn't pay anything (or very little) to open up a HELOC, and that will give you the comfort that you'll have a back-up plan just in case something else goes wrong and you need a fast infusion of cash.
Once you make these repairs to your home, then you can start saving again for tuition and other emergencies. Until you need the money, you will be saving the difference between what you would earn by having the money invested and the interest rate on the loan.
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