5 Myths Busted About Home Equity Lines of Credit

by Kathy Passman 17. November 2016

5 Myths Busted About Home Equity Lines of CreditIt’s funny how sometimes a myth can be taken as fact if it’s repeated often enough. It can even gain “conventional wisdom” status.                         

Sometimes it doesn’t matter much. It’s pretty harmless to think a tooth will dissolve overnight in a glass of Coca-Cola, and it may do some good if it keeps you away from the sugary drinks. But believing banking myths can hurt your personal finances – and there’s nothing good about that.

For example, a number of myths swirl around home equity lines of credit (HELOCs), and many of these misrepresent what is actually a safe and secure way to borrow money. With a HELOC, you can access a line of low-interest credit secured by your home’s equity – much like you would with a credit card, only the interest payments are tax-deductible and the interest rate is much lower. You should consult a tax advisor regarding the deductibility of interest and charges under the plan.

So today we want to take a few minutes to bust a few HELOC myths – and let you know the truth… 

Myth No. 1: You Can Only Use a HELOC to Pay for Home Improvements

It’s true that HELOCs were initially created with home improvements in mind. However, the fact is that you are allowed to use your HELOC to pay for just about anything – from debt consolidation to your children’s college tuition. That said, most advisors think homeowners should use their HELOCs for expenses that add value to your finances. For a list of our own suggestions, click here.

Myth No. 2: A HELOC and a Home Equity Loan Are the Same Thing

With a home equity loan, your lender will provide you with a one-time lump sum. You pay that fixed-interest loan off over time, month by month. With a HELOC, however, the bank extends to you a line of credit that you can draw upon whenever and as often as you like, within your draw period. While the interest rate is generally low (much lower than that of a credit card), it fluctuates along with the prevailing rate.

Myth No. 3: A HELOC Will Hurt Your Credit Score

On its own, a HELOC won’t do anything to your credit score. It shows up to credit scorers no differently than a credit card. But just as with any other debt you incur, late payments on your loan or maxing out your HELOC may affect your credit score. It’s wise to ensure that you do not advance your line over the approved credit limit as this also would reflect on your credit report.

Myth No. 4: You Can Pay Off Your HELOC by Making Minimum Monthly Payments

With most HELOCs, if you make only the minimum payment each month, you’ll only cover the interest. Once the “draw period” – the five- to 10-year stretch of time when you can use your HELOC – ends, the principal starts becoming due. Depending on how much you’ve used, that can be a lot of money. So the best strategy, much like with a traditional credit card, is to make much more than the minimum payment each month.

Myth No. 5: HELOCs Are Difficult to Get

Taking out a HELOC is not risk-free. But if you use your HELOC conservatively and pay more than the minimum due each month, it is among the best loan options out there.

If you’re ready to apply for a HELOC, or for more information, please contact us.

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Cut Overhead Costs, Keep the Quality: 12 Simple Ways

by Erica Starr 20. October 2016

Cut Overhead Costs, Keep the Quality: 12 Simple WaysWhenever you seek input on how to better your business – whether you’re looking to increase profits, improve cash flow, or make yourself attractive to lenders – you’ll get this bit of advice:                         

Cut your overhead.

A business that controls its overhead costs is one that’s well positioned to weather lean times while boosting its margins all the time. But cutting deeply into service costs or product development threatens to undermine the very things that make your business unique.

So here are 12 ideas that any business can pursue to reduce its operating costs without sacrificing quality. 

Low Hanging Fruit

Most businesses budget are chock full of waste and fat, and it’s incumbent upon owners to look at every line-item carefully. Consider these areas:

  • Rent: Are you using all the office space you’re paying for? There are 168 hours a week; how many hours are people actually occupying your space? If your answer is 40, you’re paying to lease space that’s being used less than a quarter of the time. Consider reducing yours by reducing your footprint. Options include downsizing to a smaller space within your current facility; subleasing unused space; renegotiating your lease; or moving. Think you need all the space you have? Consider how many of your employees are perfectly capable of working from home, at least part of the time, and would love the opportunity. Consider, also, how much space each of your employees is taking. Do you have a lot of private offices for employees who don’t really need them? If you work in a “cube farm,” how big is each cubicle – and how big does it really need to be?
  • Energy: Energy can be a big expense. Using less space is a great way to reduce that monthly bill. And with deregulation of utilities, it’s easier than ever to find ways to cut your energy costs even further. Shop around for the most cost-efficient provider. Consider energy-efficiency systems that can help you save money. State agencies and most utilities offer incentives, rebates, and other assistance to help you implement these systems.
  • Travel: Inexpensive meeting software like GoToMeeting is making it easier to have face time with clients, employees, and partners without the need to fly or drive. When you travel less, not only do you cut your travel budget, you also spend less time in transit and more time actually working.
  • "Miscellaneous": Whether it’s supplies, office parties, or something else, every company (and every department within every larger company), spends a certain amount of its budget on things that no one is really managing. Pay attention to every penny.
  • Anything that's not driving ROI: Eliminate everything that’s not producing a return on your investment: that Yellow Pages ad, for example, or a subscription service you’re not using. Dump anything that’s redundant, too. For example, it’s not uncommon for different departments or individuals to be using competing versions of the same business software simultaneously. Get everyone on the same system.

Involve Your Team

Your employees are full of ideas on how to cut overhead you’d never come up with on your own. They’re closest to the action and, therefore, the most likely to see waste and redundancies first. Of course, getting workers involved can be tough — or even backfire if it’s seen as an effort to cut staff.

Here, then, are several strategies to help you encourage a culture of employee engagement. 

  • Be credible: When you ask employees for advice, approach them with facts, not false reassurances or corporate jargon. If you need to cut overhead to make your business healthier, say so. Present them with some high-level numbers. Your employees will appreciate your honesty — and reward you for it.
  • Go beyond the survey: For businesses with more than 20 or so employees, surveys can be an effective method of gathering opinions – and simple online tools make them cheap and easy. But they’re also sometimes unwelcome. They’re a chore to fill out. Employees are often skeptical that anyone’s paying attention, but if they aren’t certain they survey is anonymous, they won’t be candid. So feel free to use surveys to gather input, but at the same time look for other platforms to solicit feedback. Private social-media groups, intranet boards, and instant messaging tools may encourage employees to share their thoughts organically, and engage in conversation.
  • Show your appreciation: Reward employees who make helpful suggestions in ways both large and small. Meaningful bonuses tied to meeting specific cost-cutting objectives; contests awarding prizes to the employee who has the best overhead-reduction idea; and even small thank-you gestures are appreciated by your team. More importantly, they’re effective in encouraging positive engagement. And make these awards in ways both expected (end-of-year banquet, employee of the month) and not (surprise gift cards and random thank-you emails).

Examine Your Payroll

Salary freezes, shorter hours, pay cuts, and targeted layoffs should never be taken off the table, especially in lean times. In fact, you need to always be examining your payroll, which is likely your largest expense.

No doubt, you’re proud of being able to provide meaningful employment for your workers while also making money for yourself. So if you do have to trim staff, you’ll want to do so thoughtfully and smartly.

  • Current employees: Start with a detailed evaluation of who’s performing essential functions and who’s not. Look for redundancies among your current team’s responsibilities, and evaluate each person’s capacity for professional growth. It may be that two employees are performing a job that could be consolidated into a single position. Instead of just keeping the more senior person, ask which employee might be adaptable to additional responsibilities. An employee who has been doing one job for 10 years may be great at that job — but it’s fair to ask why he or she hasn’t been promoted into new opportunities. In the long run, you need employees who can grow with you, and even help accelerate your growth.
  • Outsourcing: Many business owners try to keep as much in-house as possible, thinking it’s cheaper. Often, it’s not. You can cut payroll by outsourcing functions that are not core to your business, while also accessing experts in those functions — be it information technology, marketing, human resources, or something else — to do what they do best instead of forcing you to wear every hat.
  • Freelancers and independent contractors: A close cousin to outsourcing is the use of independent parties to perform services on a freelance basis. It’s tempting to reserve the use of freelancers to one-off projects, but independent contractors now perform all kinds of jobs. Indeed, before adding a new permanent position to your payroll, you should always consider whether the job could be performed just as well on a contract or freelance basis.
  • Automation: Thanks to technology, the most routine functions of just about any job can now be automated. Using business “softbots” — e.g., QuickBooks — to automate accounting, taxation, invoicing, and payroll can immediately help you reduce headcount. There’s also software that can help you cut overhead by automating, for starters, marketing, ad buying, and logistics (routing, fuel expenditures, vehicle maintenance logs, etc.).

Talk to Your Advisors

Outsourcing or automation? Engaging employees or eliminating perks? Using the cheapest vendor or the one with the best reputation? These are tough questions. Don’t try do it on your own. Your mentors, peers, lender, and banker are all valuable advisors. Use them.

For help in getting these questions answered, reach out.

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How to Pay for It: Home Equity Line of Credit vs Other Options

by Kathy Passman 12. October 2016

How to Pay for It: Home Equity Line of Credit vs Other OptionsWe’ve all heard the stories about people, before the 2008-’09 financial crisis, using their homes as “ATMs.” I’m talking about homeowners using the equity in their homes to pay for luxuries – jewelry, vacations, even cosmetic surgery.                          

We were talking recently about his relationship with his bank. And when I asked him what questions he asks whenever he’s vetting a new bank, his answer intrigued me.

That’s poor financial management, and a lot of those folks got themselves in real trouble.

Today, most homeowners seem to have learned that lesson. I rarely hear about abuse of home equity lines of credits (HELOCs) or home equity loans anymore. Instead, when homeowners do take out a HELOC, too many of them use it solely as an emergency fund.  
 
But this approach many not be the wisest choice for your money, either. There is, in fact, a middle ground between abusing the credit your home equity affords you and using it wisely.

What Is a HELOC?

A HELOC is different from a home equity loan, in which you get a lump sum amount, then pay it back according to a schedule. A HELOC makes a percentage of your home’s value available for five to 10 years, and its interest rate adjusts with the market (meaning they’re usually very low). When it expires, you only pay for what you’ve used – then it disappears with no additional expenses.

But, like a home equity loan, any interest you pay on a HELOC is treated like mortgage interest, which means it’s tax-deductible. Remember to consult your tax advisor when it comes to tax-deductibility.

Any loan or line of credit carries some risk, and a HELOC, for which you use your home as collateral, is no different. But if you are savvy and conservative, a HELOC is a safe and secure way to pay for a number of life’s major expenses. Let’s take a look at a few of them…                               

College Tuition

Because the interest rates are usually lower than those on student loans, using a HELOC to pay parts of your child’s college tuition could be a good option. Compare interest rates and closing costs to see if a student loan or a HELOC is cheaper for you.

Home Improvements

HELOCs were designed to be used for home repairs and renovations. And that’s still the primary reason homeowners take them out. However, we recommend you use a HELOC primarily on improvements that increase a home’s value. That way, any interest you pay will return to you when you sell your home.

A HELOC is also good for financing essential repairs that may not raise the value of your home but will upgrade its safety and/or structural integrity. In this case, I’m talking about fixing a leaking roof or replacing faulty wiring. 

For other home improvements, such as interior design and landscaping, tap your cash savings (though not your emergency fund). Or, put it on your credit card and pay it off at the end of the month. That way you can insure the equipment you buy — and pick up some points. 

Emergency Fund

Everyone should keep an emergency fund to cover unexpected health bills, car repairs, and home repairs. Where you keep that emergency fund depends on your situation and financial philosophy. Some people believe that any money that isn’t “working for them” is useless. They keep their emergency fund in an easily accessible interest-paying savings account.

However, the interest rates on savings accounts are pretty measly these days. And so, you might be better off piling most of your cash into a stock market index fund. It’s not very sexy, but it earns more than a savings account. Then, use your HELOC as your emergency fund.

Consolidating Debt

Besides what you pay off at the end of every month, do you have any credit card debt? If so, get rid of it. Use your cash to pay off what you can, and then pay down as much as you can of the rest using a HELOC. Home equity lines of credit charge much less interest than credit cards, so you’ll be saving money. Plus, unpaid credit cards hurt your credit score and, therefore, your chances of getting loans in the future.

If you consolidate debt using a HELOC, you’ll get out of debt faster thanks to those lower interest rates. Plus, you’ll essentially be paying yourself rather than Visa or MasterCard.

If you’re ready to apply for a HELOC, or to talk more about the best ways to use a HELOC you already have, please contact us.



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