We’ve officially entered fall, and it’s a great time to talk about borrowing.
A discussion about borrowing may not be on your fall to-do list, along with putting away the patio furniture, but better today than tomorrow.
The truth is that fall is a great time to consider borrowing through a home-equity loan to make improvements to your house before winter hits. A home that is in better shape with new windows, more insulation and an up-to-date furnace will save you money all winter—and actually all year long. That’s obvious.
But here’s the not-so-obvious part: These improvements aren’t just the kind that will provide benefits for a short while. They are long-term fixes that will pay dividends by keeping money in your pocket year after year, including long after the debt is paid.
That’s why it makes sense to tap what probably is your most significant long-term asset, your ownership stake in your home, to make them happen. If you can’t afford to pay for a new furnace or windows out of your savings or checkbook, and most of us can’t, it’s more than OK to consider taking out a loan backed by the value you have accumulated in your home.
It’s a smart financial decision to spend money that will allow you to save money—and especially if you can save money year after year. Those long-term savings will help you repay the loan. The improvement to your long-term asset, your home, also will allow you to get a higher price when you sell it.
What isn’t a good investment is making a long-term financial commitment for a short-term gain. That’s why, in most cases, I am highly skeptical of tapping home equity or other long-term options to pay for a vacation or to buy something like a snowmobile or ATV. I have nothing against these purchases. But how you finance them matters.
A long-term debt for long-term benefit? Absolutely. A long-term debt for short-term pleasure? Probably not. Call it Dale’s First Rule of Borrowing.
The same thinking applies to credit card debt. If you make purchases that provide short-term benefits, it’s probably best to pay with cash or your debit card, or to pay off the credit card balance before you start incurring interest charges. Save the credit card debt for financing bigger-ticket purchases that will provide benefits for some time, such as a new washing machine or refrigerator.
Borrow money only for as long as the purchase will last. So don’t be afraid to use long-term financing such as a home equity loan for purchases that provide long-term benefits. In fact, missing these opportunities can be harmful to your finances. What good is all that equity in your home if the drafty windows drain your bank account every winter by running up the heating bill?
My First Rule of Borrowing isn’t rocket science. But it’s a good rule to keep in mind, particularly as you’re wrestling with how to pay for what you want and whether to make major changes to improve the value of your home.
Consumer borrowing is part of the American experience. It’s how most all of us achieve the dream of home ownership. But shortsighted thinking about borrowing also has its costs and has created much trouble for us as individuals and as a society.
With fall officially here, it’s a great time to think about smart borrowing that actually can help you get ahead financially. It’s something to consider as you take in the patio furniture.
Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at firstname.lastname@example.org or 218-722-3500.