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Column: Long-term borrowing for short-term assets is a bad idea

Dale Lewis

Interest rates are low. It’s a great time to borrow. You can tap the equity in your home to get cash.

Wait a minute. Let’s talk about it first.

Be careful when you borrow. Yes, all of the statements in the first paragraph are true. Yes, you can borrow against the equity — the ownership stake — you have in your home, providing access to cash for projects and spending at low interest rates. But the equity in your home is extremely valuable. You should use it deliberately.

I like to tell banking clients that they should use long-term borrowing only for spending on items that will last a long time. So it’s OK to borrow over a long period for a house or a car.

But you don’t want to pay for short-term consumer spending — meals out, clothing or even back-to-school supplies for the kids — with a home equity loan or credit card borrowing that you don’t pay off quickly. That is long-term borrowing for short-term assets and it breaks the rule. Think about how much those back-to-school supplies will really cost if you put them on the credit card and don’t pay off the balance quickly. Not a good idea.

So back to tapping the equity in your home for a loan. Is this a good idea? If the home equity loan simply will finance a vacation or other short-term goods or services, then maybe not. But if you use the proceeds of your home equity loan to improve your home, say a kitchen remodeling project or building an addition, then the answer is almost certainly yes.

Rates are really good right now, and those of us with equity in our homes can tap it to make where we live more attractive in an appreciating real estate market. That’s smart spending. It also may be tax deductible, so consult your tax adviser.

Even reaching into your home equity for a lower-interest loan to consolidate high-interest debt may be a good idea. Perhaps the credit card spending that got you in trouble wasn’t used to buy long-term assets. But the reality is that this debt now is part of your long-term financial picture. So better to clear it out and borrow against your home equity to help you lower your rate, make reasonable payments and get out a jam.

The goal, of course, is to avoid these situations in the first place. You can do so if you keep my simple rule in mind: Long-term borrowing should be for long-term purchases only. If what you want to buy won’t last five, 10 or 20 years, then think hard about how you will pay for it. A home improvement will still be around by the time you pay off that home equity loan. A vacation won’t be.

Better to dip into the savings account and pay with cash when you’re tempted by a purchase with a short shelf life — even when borrowing conditions are as good as they are now.

Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at president@parkstatebank.com or 218-722-3500.

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