Bank pushing HELOC

mary_md7April 28, 2009

For all the talk of "no credit" (which is as much hype as substance, I suspect), my bank tries to push a HELOC on me regularly.

Last time, they were giving me the "too much in savings" pitch and wanted me to put the money in a CD instead. I pointed out we had saved that money as a liquid rainy day fund. "Oh, don't use your savings, we can get you a HELOC...."

I realize my LTV ratio is low and my FICO is high, but you'd think they'd discourage using the house as an ATM on a rainy day.

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triciae

"I realize my LTV ratio is low and my FICO is high, but you'd think they'd discourage using the house as an ATM on a rainy day."

Why would they discourage that? There is nothing inherently wrong with using leverage. There is nothing inherently wrong with using your home's equity to further your financial goals. Using leverage you can't pay back is what's wrong.

You sound like a good credit risk & banks are in business to "sell" money. If nobody borrowed...there would be no banks for your savings. It's simple. Banks take your savings & lend it to others...hopefully to credit-worthy borrowers like you.

A disciplined investor will allow their real estate's equity to work for them rather than sit there as dead money. HELOC's did not cause the financial breakdown. Borrower's poor discipline & decision-making skills did, however, contribute to the debacle. Based on your "high FICO", you do not sound like one who made poor decisions.

BTW, I also agree with your banker about the CDs rather than savings accounts. Laddered CDs works well for safety net savings & usually pays a higher yield. Why would one not take advantage of that opportunity? It's not likely a person would need an entire year's worth of living expenses all on the same day...so keep some amount in a cash account, ladder the rest in CDs, & keep rolling them.

I do not agree with your banker that a HELCO is a substitute for an emergency cash fund. Doing that could quickly turn you from a credit-worthy borrower into a statistic.

/tricia

PS You WANT your bank to encourage credit-worthy borrowers to take out that HELCO, don't you? If not, how do you expect them to stay in business? While I'm on this toot...another thing to remember is that if everybody followed the advice on this forum & never carried a balance on a credit card...there would be NO CREDIT CARDS FOR ANYBODY because CCs are not a convenience that bank's offer from the goodness of their hearts. They are supposed to make money for the bank. Now, it's true that a well run bank can either break even or make a miniscule profit from just the fees they charge retailers...no bank would assume that risk. So, if you enjoy having the convenience of a CC...be glad some people carry CC balances. And if you like having the convenience of banking services be glad some people borrower for a new car, use their home's equity to pay for higher education, use a HELCO to purchase income-producing property, borrow to start their own business or expand an existing business, & even borrow to spread the cost of that once-in-a-lifetime world cruise over five years. "Loan" is not a dirty four-letter word.

I am sick. I am cranky. I am tired of this generalized bank bashing. Let's just put all of those "banksters" out of business. Heck, we'll all just stash our cash under the mattress & barter for our food. Cash & carry all the way. That will teach those "banksters" a lesson!

Since September 28, 2007, the FDIC reports closing 54 banks (www.fdic.gov). The FDIC had better get cranking...heck, they're not even busy yet as compared to the S&L Crisis.

The problem with this "crisis" is that it's hitting our money-center banks the hardest. Due to counterparty risk, a pro-active solution was required. Those counterparties included many international banks, our largest institutions, & several states (CA, VA, HI, as examples). A.I.G. was acting as sort of a conduit to funnel money to dozens of financial institutions around the world. If AIG failed most banks in Europe wouldn't have gone down with them. These are mostly banks who bought insurance from AIG against the possibility of a global financial meltdown. AIG is hopelessly tangled in our money-center financial institutions' well-being. Letting them turn out the lights & last man out lock the door wasn't an option folks.

...rant spoken tongue in cheek (sort of). And, since I have just been diagnosed with Sjogren's Disease my tongue is permantly stuck to my cheek!! :(

Here is a link that might be useful: Wiki: S&L Crisis

    Bookmark   April 28, 2009 at 1:52PM
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triciae

End of rant mistake...

"...wouldn't have gone down with them."

Should have been "would have gone down with them". I rewrote the sentence to tone down my little rant & didn't change all the words correctly...sorry.

/t

    Bookmark   April 28, 2009 at 1:57PM
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seattlemike

triciae: I'm nowhere being a financial guru, but nevertheless, thoroughly enjoyed reading your "rants". Makes sense to me. At least, your points add some balance to the bank-bashing frenzy.

    Bookmark   April 28, 2009 at 2:10PM
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mary_md7

"There is nothing inherently wrong with using leverage."

Leverage means debt, right? Why do debt when one has the money to pay for something? Other than a first mortgage on a principal residence, I have no debt and want none. Other disagree and that's fine for them.

    Bookmark   April 28, 2009 at 4:18PM
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dave_donhoff

Hi Mary,

Leverage means debt, right?

Sorta, yes... but it has a bit deeper meaning than merely "debt."

Borrowing money at 18% for a pizza dinner, or a family vacation, is "debt." It is straight and unadulterated consumption also... money borrowed and burned away with no lasting benefit thereafter.

Borrowing money at a longterm 3% cost, and having it grow at 6-8% over time in a safe compounding manner (where the interest paid on it then earns interest on top) is "leverage."

Having the Pre-Committed FACILITY to use borrowed money (a line of credit) at, say, 4%... which then frees up the safety cash reserves you WOULD have held in a liquid account bearing virtually no interest... to then be able to EARN interest... while the credit line costs NOTHING (as long as the funds are unneeded,) is *WISE* leverage.

Why do debt when one has the money to pay for something?

So that your money can be working for you when you don't need to have as much of it standing by idle and unearning.

OF COURSE, if you are past the point of financial independence, where you safe, passive income investments throw off more than enough annual income to cover your lifestyle and safety concerns, then leverage may no longer be necessary.

In short;
Consumptive debt is generally bad.
Safety leverage is generally good.

EVERYONE *should* eliminate all of their leverage....
Just NOT A MINUTE NOR A DOLLAR before it is actually safe to do so.

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   April 28, 2009 at 5:42PM
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triciae

There's nothing wrong with your desire for no debt "other than a first mortgage on a principal residence", mary md7.

It does limit your upside potential though. There's a lot of well proven truth behind the statement, "It takes money to make money."

In very simplistic terms, take the young college graduate who owns nothing but jeans, t-shirts, & sandals & couldn't find $10 in cash without rummaging underneath the car seats & sofa cushions. That person is wise to purchase several suits of business attire on credit before walking into the first job interview. They are investing in themselves. Good use of leverage.

Two years later, that same young person...

They've received their first promotion. They've managed to pay off the suits, buy some furniture, & even set a bit aside in savings. Now though, on occassion, they will be required to have other employees & also customers of their employer in their car. That young person is wise to purchase a presentable car on credit. They are, again, investing in themselves. Being, for example, a sales rep for a major national company means you can't be driving around in a $1,500 junker. Good use of leverage. Buy a car you can pay off within 36 months.

At 26, our college graduate is now earning a nice salary but is still renting an apartment & Uncle Sam is biting hard on April 15. Leveraging a condo is an investment in their future. Good use of leverage.

Time flies...now our graduate is entering his/her mid-30s & has spent their spare time developing a new battery design. There's a market for his/her batteries but he/she needs cash to start the business. Ah Ha! He/she has a condo with equity! A new business is born.

The batteries are selling well. Our now 40 year old has paid off his condo equity loan & would like to expand his business. To do so, he'll need to hire 10 more employees & expand his physical plant. He uses leverage from the bank where he has his business account. They give him an equipment loan & also a working line of credit. He puts an ad in the paper creating 10 new jobs in his community.

Eight years prior, he/she married & purchased a single-family residence but didn't sell the condo. Rather, kept it as income-producing property. The condo has appreciated a lot over the years. Once again drawing on the condo's equity, he/she takes some of that "dead" money & invests in purchasing the building his business has been leasing for their plant. Good use of leverage.

My goodness, little Johnnie is graduating from highschool in June! How time flies!! Gosh, that means tuition. Our business owner has sufficient cash reserves, the business is holding its own & growing albeit at a slower pace at it matures, & his single-family residence represents $500,000 in "dead" money. A $70K-$80K equity withdrawal secures Johnnie's education (an investment in Johnnie, so to speak). Our business owner can readily afford the 15-year fixed rate mortgage payment & Johnnie can attend school without incurring a huge debt burden. Good use of leverage.

Ahem. You get the idea. Without leverage our young graduate's choices would have been much fewer.

/t

    Bookmark   April 28, 2009 at 5:58PM
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dave_donhoff

(Someone thinks someone else has had more than her normal share of coffee recently ;~)

    Bookmark   April 28, 2009 at 7:03PM
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Chemocurl zn5b/6a Indiana

LMAO....I've been accused of that myself a lot lately.

    Bookmark   April 28, 2009 at 11:34PM
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