Given the rising interest rates, if you have been using your HELOC (Home equity Line of Credit or Secured Line of Credit) for investing or for debt payments, here are 3 solid ideas to do with that account.
- Reduce the principal
- Pay it Off
- Close it
With interest rates rising, paying off debt has now become a solid investment plan. It will pay upwards of 4% in this situation (as of May 2022).
1. Reduce the HELOC Principal
If your HELOC rate is at 4.5%, every dollar you pay to the principal saves you 4.5%. That money stays in your pocket, so it can be used for other things, and it is risk-free. This makes it an excellent investment.
This gem has disappeared for a long time, due to very low-interest rates. With rates now going up, paying off debt is a good investment, again.
2. Pay it Off
This fits in nicely with the Debt is Bad view that I have. This is also a follow-on to (1) Reduce the Principal. Having no debt creates so many choices and options in your life. You can then invest the money you were paying off the HELOC principal with.
3. Close It
This assumes you have achieved (2) by paying the line of credit off. Why close it?
- One less thing that is vulnerable to identity theft or fraud
- Helps with FOMO, you will spend with less impulse with less to spend with
- One less thing for your bank to charge you service charges on
I am confident many financial planners will poo-poo this perspective. I have always found borrowing to invest a risky thing to do, but paying off debt is never risky. You could put that money in a HISA for the moment until you decide what to do with it.