Recently, home equity loans and lines of credit have become the bane of my practice, mainly because of abuse by one spouse. Now, I do not want my colleagues in banking and financial services who also write for this publication to show up at my door screaming that I am trying to drive business away from them. That is not the case at all. While these products can provide resources for many good reasons, they can also be misused in ways to hurt your spouse, and often, yourself. When deciding to take out a home equity loan or line of credit (because this is just another mortgage), here are some things to think about:
- Paying off separate debt. If your spouse comes into the marriage with debt (credit card, mortgage, student loans), you may think it is a good idea to take out a home equity loan on the home either you or both of you own to pay off this debt. This may actually be an excellent way to pay off the debt as it can reduce interest, allow you to deduct the interest, and provide a net savings to your family. However, there are a few things that you should keep in mind.
- Are one or both of you making payments towards the home equity loan to pay it off? For example, if you paid $500.00 per month on your student loan, are you using the same $500.00 per month to pay off your home equity loan?
- Is there a plan if the relationship does not work out? Have you prepared a pre- or post-nuptial agreement? For example, you take out a home equity loan to pay off your spouse’s credit card debts of $10,000.00. You do not pay down the loan and the relationship then dissolves. Are you responsible for all or part of this loan?
These are items that should be discussed and formalized in an agreement.
- Is one person using the loan without the other person’s knowledge? If both own the property and/or have a vested interest, then it is very important that both be signatories for any withdrawals, checks on the line of credit, etc.
- “Emergencies” – Some people take out lines of credit for a possible “emergency”, but spouses may not agree on the definition of an emergency. Think about what constitutes an “emergency” and discuss this with your spouse.
- What are your goals? If your goal is to someday own your home outright, then further borrowing against it will push that goal away. For a large purchase such as a car, consider a low interest loan from the dealers. If you have an emergency medical procedure, you can generally work out a payment plan with the healthcare facility. For many other emergencies, a personal loan or utilizing a credit card may be appropriate.
When borrowing money, whether alone or with another person, make sure that you have clear goals and have protected yourself so your goals can be realized.