Wednesday, November 4, 2009

Get Smart About Debt - Rule #3

Not long ago you might have drawn on a home-equity line of credit (HELOC) for college costs, emergencies, even a new car. Now, lenders have cut these credit lines and real estate values have sunk. In fact, the average real housing wealth declined 13% from 2005 to 2008. Consequently, home equity is no longer easy money. Considering these factors, rule #3 of "Get Smart About Debt" is to tap home equity sparingly.

If you are lucky enough to still have a HELOC, tap it only if you'll be left with at least 20% equity and you live in an area where home prices have leveled off - otherwise you may end up underwater on the loan. If a HELOC isn't viable, use federal loans for college (often better anyway, since their rates are fixed). In an emergency, a 401(k) loan is an option, though you'll miss out on investment growth and owe interest. Plus, typically you have to pay these loans back within 90 days if you're laid off.

Looking for a way to add liquidity to your financial portfolio? Speak to an independent fee only financial advisor who can help you establish an appropriate emergency fund. After all, an emergency fund consisting of three to six months worth of expenses should be established before investing funds elsewhere (including in a 401(k) or an IRA).

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