The Power of Home Equity

When Santa says “Ho, ho, ho,” he’s probably not thinking about home equity. But maybe he should. Home equity can make you merry — very.

It’s not too merry renting when all of your payment goes to your landlord. But with a house payment, only some of your money pays interest, the rest builds equity — and eventually you own your house free and clear.

Zions Bank has long been a big supporter of homeowners building equity as fast as they can. In fact, a couple of decades ago, Zions was the first bank in the country to create a mortgage that allowed people to refinance their home to a shorter term and lower rate without any new fees. It meant people could own their homes in seven years or less, instead of 15 or 30 years.

Of course, owning a home does come with its share of unexpected costs that can overwhelm your savings. For example, most roofs will eventually wear out (though not usually from reindeer hoof damage, thank goodness) and replacement could cost $10,000 or more.

You may wake up one day and realize that your central air unit has died or your chimney is damaged (Santa may have gained a few pounds). These repairs don’t come cheap.

If you have enough room on your credit card, you can always pay for home repairs that way, but credit card interest rates can be up to 15 percent or more. What if you could pay off these high rate accounts with a much cheaper source of funds?

That is where home equity comes in. Credit card loans are unsecured so lenders charge a high rate to cover eventual losses from borrowers who don’t pay them back. When a loan is secured by home equity, borrowers can get a much better interest rate.

With a lower rate, homeowners making the same payment, when moving from a high rate credit card debt to a home equity loan debt, can pay off their debt much faster. A lower interest rate, a faster repayment schedule — what’s not to like about that?

As a rule of thumb, anytime you consolidate debt and pay off a high rate loan with a lower rate loan, that means you keep more money. Even better, that is not the only way you save. Some types of loans come with myriad fees. Not so with a home equity credit line. That’s another reason to use this type of loan.

So, is it ever a bad idea to get a home equity credit line?

You’ve worked hard to build the equity in your home. If you were to use your home equity credit line to pay for eating out every day, it would literally eat up your home equity. It also wouldn’t get you out of debt faster.

Another good rule of thumb is not to use your home equity credit line to fund impulse purchases that you should cover from your regular paycheck. (Don’t treat home equity as a bottomless Santa’s goodie bag.) Save your home equity credit line for major, planned purchases, and interest-saving debt consolidation.

Saving interest and paying debt off faster is sure to lead to a Happy New Year — that’s money in the bank.