Learning From the Financial Pain of Others
George Boelcke FCI
August 26, 2008
I had a great phone call last week from a radio listener. After we talked, I realized there were a bunch of things in the call that are huge lessons for all of us:
The caller shared that she and her husband were two years away from paying off their mortgage. As I was heading for the fridge to pull out some champagne, she volunteered that they also had a $100,000 home equity line of credit.
Stop! What? OK, let´s not kid each other here. That means they´re a long way from a mortgage burning party. The line of credit is secured against their home – it counts! Kind of like saying we´re debt free except that $8,000 Visa balance. Nice try…
This couple is also planning to retire in a few years. But that means no more paychecks and a big switch to a fixed income. What happens then? Most of us drop back to paying interest only on these horrible HELOCs and that means it´ll never be paid off!
Those circumstances describe a large number of people in a very similar situation, so let´s look at three points:
Combine the first mortgage almost done with the line of credit. TODAY! Credit lines are variable rate and change every month. The next rate waves are up up and away. Take the amount you´re paying on the two right now and put it into any on-line calculator. In this case, it´s about $120,000. Shop around for a fixed rate and plug in the current payment to get the term. In other words, don´t take a 15 year mortgage and drop the payments. Take the payment and make the term work.
Make that payment as high as you can possibly afford and that should give you your retirement date. Because then, you´ll be ahead of the game $1500 or $2000 a month.
Have the payment and term before going to your credit union or community bank. Don´t let someone tell you, "well, you should add a cushion of $10,000" or "you should stretch the mortgage so you have some cushion." Bullcrap – you´re being sold! So get out of there quickly or tell them to get real: You´re NOT looking for a longer term or more debt. They´re attempting to make themselves richer and that ALWAYS has to be from your pocket! That´s NOT what you want and you´re in control!
Now as to how the HELOC got to be $100,000 the caller was more evasive. Well, it was a little of helping the kids and a couple of appliances and "you know how it is." No, I don´t. But isn´t that so true? A few thousand here and there that don´t seem like much at the time. And it´s so easy because we can just write a check and pay interest only. But looking in the rear-view mirror, it´s a huge amount and will now kill their original retirement plans.
Whether you´re close to retirement or closer to starting your career: You be careful out there. It might take a few minutes to spend it but can have a lifetime of implications of financial pain!
The caller shared that she and her husband were two years away from paying off their mortgage. As I was heading for the fridge to pull out some champagne, she volunteered that they also had a $100,000 home equity line of credit.
Stop! What? OK, let´s not kid each other here. That means they´re a long way from a mortgage burning party. The line of credit is secured against their home – it counts! Kind of like saying we´re debt free except that $8,000 Visa balance. Nice try…
This couple is also planning to retire in a few years. But that means no more paychecks and a big switch to a fixed income. What happens then? Most of us drop back to paying interest only on these horrible HELOCs and that means it´ll never be paid off!
Those circumstances describe a large number of people in a very similar situation, so let´s look at three points:
Combine the first mortgage almost done with the line of credit. TODAY! Credit lines are variable rate and change every month. The next rate waves are up up and away. Take the amount you´re paying on the two right now and put it into any on-line calculator. In this case, it´s about $120,000. Shop around for a fixed rate and plug in the current payment to get the term. In other words, don´t take a 15 year mortgage and drop the payments. Take the payment and make the term work.
Make that payment as high as you can possibly afford and that should give you your retirement date. Because then, you´ll be ahead of the game $1500 or $2000 a month.
Have the payment and term before going to your credit union or community bank. Don´t let someone tell you, "well, you should add a cushion of $10,000" or "you should stretch the mortgage so you have some cushion." Bullcrap – you´re being sold! So get out of there quickly or tell them to get real: You´re NOT looking for a longer term or more debt. They´re attempting to make themselves richer and that ALWAYS has to be from your pocket! That´s NOT what you want and you´re in control!
Now as to how the HELOC got to be $100,000 the caller was more evasive. Well, it was a little of helping the kids and a couple of appliances and "you know how it is." No, I don´t. But isn´t that so true? A few thousand here and there that don´t seem like much at the time. And it´s so easy because we can just write a check and pay interest only. But looking in the rear-view mirror, it´s a huge amount and will now kill their original retirement plans.
Whether you´re close to retirement or closer to starting your career: You be careful out there. It might take a few minutes to spend it but can have a lifetime of implications of financial pain!
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