There’s a reason the English language’s greatest playwright was called “The Bard of Avon” and not “The Bard of St. Cloud.” In Hamlet, for instance, despite the fact that Shakespeare’s Polonius character is supposed to be a wise counselor, he gets at least one piece of advice wrong when he tells his son, “Neither a borrower nor a lender be.”
This is flat-out terrible advice—at least for many St. Cloud homeowners.
The thing about borrowing is that if done prudently, borrowing can free some of the value a given St. Cloud residence represents. There are two different ways that happens:
First off, there is the property’s stored value (the equity). As each monthly mortgage payment whittles down the amount owed to the lender, that equity builds—more so if the value of St. Cloud real estate happens to be growing in general, which has been true lately. Unlike the other daily living expenses a family incurs, the dollars paid for your St. Cloud shelter aren’t entirely “spent”—that is, lost. Like a savings account, the portion of the money that isn’t apportioned to interest will be recapturable when the home is sold.
Better yet, you don’t have to sell the place in order to free some of the value of that equity. After all, if you had to move out of your house to make use of it, it would be highly inconvenient. But you can make use of the property’s value in the meantime by naming it as collateral for a loan—either a line of credit (HELOC) or a home loan (a second mortgage). Because both types are smiled upon by lenders since they are secured, the interest rate will be less than for other kinds of personal loans.
The second way that Polonius’ advice would have been wiser in Hamlet’s Denmark or Shakespeare’s England than it is here today involves a more contemporary character: Uncle Sam. Some or all of the interest paid on either a HELOC or a second mortgage may be taken as a personal income tax deduction, depending upon various factors. Polonius might foolishly offer some blanket advice about that—but wiser counsel would be to consult your tax advisor.
When it comes to deciding which makes more sense for tapping into your home’s equity— opening a line of credit or second mortgage—the choice depends on the uses planned for the cash. If you know exactly how much you need (as when a major home repair is needed), the key advantage of an equity loan is that the interest rate and repayment schedule are fixed. With a HELOC, you have more flexibility: it works like a credit card. You can repay a borrowed amount and later tap into the line of credit again without reapplying. On the other hand, the interest rate and repayment requirements can change over time. And like a credit card, there is a built-in temptation to overuse it. Polonius wouldn’t approve...
The financial wisdom of owning your home was around long before Shakespeare’s time— it’s one thing that doesn’t change. Whenever you have a question about your own plans and St. Cloud real estate, I hope you’ll give me a call. As usual, the Bard had something wise to say about that, too: “Better three hours too soon than a minute too late!”