A HELOC for all the wrong reasons
I recently heard a radio advertisement for a Home Equity Line of Credit (HELOC). The bank that paid for the radio spot was one of the largest financial service companies in New England. I’m sure this bank does many things well to help their customers, but in this case, they are not doing what is in their best interests.
There are many justifiable reasons to tap into the equity of your house. Families have used the equity in their homes to pay for home improvement, education, a health emergency, or to even help pay for the costs associated with a transition into a new career. This bank was advertising a HELOC for all the wrong reasons. They were trying to sway the audience to use a HELOC to buy a new car, take a dream vacation, or to consolidate all their debt.
Someone paying for a vacation with a home equity line will unlikely need any retirement planning. The dream vacation will last a week, but the HELOC loan will last a decade. This advertisement actually endorsed skipping out of work to take that dream vacation.
If a vacation wasn’t your fantasy then this advertisement wanted you to buy that vehicle of your dreams. There is a reason why most auto loans are only for 5 years and not 10-15 years like a HELOC. The car will eventually be worthless, while the interest on the HELOC will likely rise. I could almost guarantee that the person who had a weak moment and used the HELOC to go on a vacation or purchase a car will have a bad case of buyers remorse when that first HELOC statement is delivered in the mail.
Amy Hoak wrote a post on MarketWatch and she said that financial planners caution homeowners against using home-equity loans to fund short-term expenses, including vacations. According to results of a recent Discover Home Equity Loans survey, the most popular use of money for a HELOC was taking a vacation for more than half of U.S. homeowners (ages 30 and 34 who have owned a home for three years or more).
These advertisements are very effective or they wouldn’t be running. The likely target market and demographic for this advertisement, which aired on a sports radio show, are the millennials that never lived through the credit crisis. They must not realize that their home equity can disappear overnight.
A HELOC should never be used for any short-term splurges. A good case can be made to take out a HELOC for an emergency or to cover medical expenses. I realize that all of my readers are already financially savvy enough and know much better than to take a HELOC to take a vacation or buy a car. I wrote this post because it’s always good to know what other people are doing with their money. As we all learned in the technology bubble and credit crisis, it’s other peoples follies that can indirectly impact your employment, savings, and home value. Let’s hope that nobody acted on this advertisement because living through one credit crisis was enough for one lifetime.
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