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Tapping home equity for the holidays

Should you use your home equity in place of a Christmas club account? It depends upon how responsible you are.

Experts in personal finance agree that you should buy gifts with cash instead of buying them with credit.


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"Of course, cash is always king," says Rudy Cavazos, spokesman for Money Management International, which runs credit counseling agencies in states from California to Maine. "The best way to holiday shop is to tap into money you set aside for Christmas shopping in some sort of savings account."

Many credit unions and banks offer Christmas club accounts, in which customers set aside money from every paycheck. The money goes into accounts which the customers tap during the holiday gift-giving season. The accounts are useful not only because they enable customers to buy gifts without going into debt, but also because they force people to draw up gift-giving budgets.

Having a budget, naturally, is the key to not overspending for gifts, as long as you have the discipline.

Certainly, many conscientious people follow that gift-buying advice, just as many disciplined diners eschew overeating during the holidays. The rest of us plunk down credit cards at every counter and pig out at every party.

Inexpensive borrowing option
Assuming that you don't pay cash for all the gifts you buy, the best thing to do is borrow the money using the lowest-cost credit you can find. If you own a home and have a home equity line of credit, that's probably the cheapest source of credit that's available to you.

Is it prudent to use home equity for the holidays?

"Prudent?" echoes Anthony Hsieh, president of HomeLoanCenter.com. "No. But is it done? Yes. It all comes out to the discipline of each individual borrower."

As Hsieh mulls over the subject, he warms to the idea of using home equity to buy gifts, sort of. As he thinks out loud, he arrives at three propositions. First, it's better to pay cash for gifts instead of going into debt. Second, if you decide to go into debt anyway, "figure out what your budget is and when you're going to pay it off."

Third: "Consumers should always look at the cheapest source of borrowing. If you borrow, you need to look at the cost of borrowing that money over the length of time you believe you will be carrying the debt."

In most cases, a HELOC is a borrower's cheapest source of money. The average rate on HELOCs is around 4.8 percent. Interest paid on home equity debt usually is tax-deductible, so the effective interest rate is even lower. That probably beats any credit card that you have, unless you have a super-low introductory rate on purchases.

A no-brainer, but ...
"I don't think anyone should spend indiscriminately, beyond their means," says Bob Walters, vice president of Quicken Loans. "That said, if you have a choice to pay 14 percent credit card debt or put it on 4 percent, deductible, home equity, it's an easy choice. The premise is that you'll be paying that down."

Different lenders have different rules for their lines of credit. Usually you can access a HELOC through a credit card or a specially issued check. Many lenders require you to withdraw a minimum amount each time you draw from the account. Depending on the lender's rules, you might be able to charge each purchase on the equity line, or it might be more feasible to charge everything to credit cards, then pay off those cards immediately with convenience checks from the equity line.

After that, pay off the debt as fast as you can.

"We know that people are still going to use credit cards at this time of year," Cavazos says with a mild air of resignation. "We recommend that you set up a plan to pay off these Christmas purchases in 30 days -- 60 days max -- so you're still not paying for Christmas gifts in May and June."

If you are still paying for the previous year's holiday gifts in the middle of the year, it's a good idea to change your perspective. Instead of paying for the previous year's gifts in May and June, try paying for the current year's gifts in May or June. Start holiday shopping in shorts-and-sandals season. "Sock gifts away in the closet," Cavazos says. "This is an effective way not to overspend during the holidays."

-- Posted: Dec. 18, 2003




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