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.