The True Meaning of A Home Equity Line of Credit  

As a Financial Advisor it was always difficult for me to recommend to my clients that they should have a Home Equity Line of Credit.  I remember having a very hard and time consuming discussion with my manager about how detrimental a line of credit is to my client’s financial health.

I did convince my manager that not every customer who owns their own home should have a line of credit.  I had to show her that a person who is consistently a seeker and an abuser of credit should not be encouraged to use the equity in their home for a line of credit. People with those tendencies see the line of credit as more available cash to use as they please.  There are some people who view the line of credit as their own cash.  It is not.

People who are abusers and seekers of credit should be taught to pay off the mortgages sooner rather than later.

I believed that then and more so today; especially as I listen to all the commercials on the TV and Radio where the sales pitch encourages consumers to use the Equity in their home to do renovations and have all the things that they thought they could never have.  The commercials are written in such a way that it sounds like the home owner does not even have to make a payment.

When I realized the disasters people created in their financial lives because of the poor use of a Home Equity Line of Credit I made up the following list that reveals the true meaning of an Equity Line of Credit.

Take a look, see if you can remember being in any of those situations.

E.    ERODE– destroy or be destroyed – destroyed your finances for ever.

Q.   QUAFF– to drink repeatedly – constantly using the revolving credit getting deeper and deeper into debt.

U.   UNDERCAPITALIZED – with insufficient capital to achieve a desired result – always increasing the equity to do or buy more.

I.    IDEALIZE– to represent a thing as being perfect or ideal – it is not and never can.

T.  TAUT – stretch or pull tightly causing your finances to be tight and you tense.

Y. YAMMER – to lament – regretting and mourning about the choices and decision you made to take the Home Equity Line of Credit.

 

 A home equity line of credit prevents you from owning your home sooner; it prevents you from being mortgage free.  A home equity line of credit is a VERY BIG credit card on paper it is no different except it is tied to your home and you are tied to it for as many years as it would take you to pay off a mortgage.  A home equity line of credit is a fancy and new name for mortgage or what was called a second mortgage.  The available balance is not your money it is money that your financial institution has lent you against the value of your home. 

What you have done is give the bank your home for a second time now with the new name of Home Equity Line of Credit.

If you are someone who carries a balance on your credit cards and take loans every three to four years for paying off your credit cards or other forms of debt, the single biggest mistake you can make is to attach a line of credit to your home.  The very same habit you have formed of always using credit will be the same, only now you will be putting your home on the line.  What would happen if you lost your job or got sick could you make the payments on the mortgage and the line of credit?

If you have already made the mistake of taking a line of credit ask your bank to turn it into a regular variable closed mortgage and pay it off as quickly as you can.

The word MORTGAGE begins with the French word for death – MORT – which means it has a life and will die at the end of the AMORTIZATION another word with the French word for death again.   Home Equity has nothing that means death or end in it; if a debt can’t die you know that it plans to be with you until you kill it or until you die.

If you are one of the fortunate ones who has not placed a Second Mortgage (which is what a Home Equity is) on your home, congratulations!  You need to stay focused on paying down your mortgage. The most wonderful feeling you will have as a home owner is to wake up one day and not have one single mortgage or credit card payment to make.  Your money is all yours and you can do with it what you please and when you please.  That is what Financial Freedom is.

Remember to aim to retire any debt you have before you are ready to retire. 

Tessa- Marie Shillingford is the author of Controlling the Debt Monster. She is Personal Financial Planner, with a designation from the Institute of Canadian Bankers, and a Financial Counsellor certified by the institute of Canadian Banker. She is presently a Program Facilitator of Financial Literacy at JVS Toronto. Tessa- Marie was employed by TD Canada Trust for twenty years in the retail section of the bank. During her tenure at TD Canada Trust she held various positions interacting with customers of the bank. As a Financial Advisor and Manager of Financial Services she led a group of Financial Advisors in helping customers of TD Canada Trust successfully manage their finances. Details of her book… Controlling the Debt Monster, can be found at http://www.controldebtmonster.com