After short sale, don't hurry into a HELOC

Dear MTA,

The question I have to ask is, “Why do you want a HELOC?”

H-E-L-O-C stands for Home Equity Line Of Credit. That means you are using your house as collateral for a line of credit. You can use that line of credit to make purchases up to the HELOC limit.

It is similar to a credit card account with one very important difference. If you don’t pay the loan back in full, the lender could take your house away. So, if you are going to take out a HELOC, please have a very good reason.

Other types of loans may be better choices. An installment loan could give you lower interest rates or fees, and without the need to use your house as security. If the account is for smaller purchases, a credit card could be a better alternative.

The length of time it will take to be able to qualify for a HELOC or any other type of account depends on how severe the negative information is in your credit history.

The term “short sale” describes settling a mortgage debt for less than you owe. Any time you settle a debt, it is negative. A settled mortgage debt will likely be very negative.

Most people I talk to who have had to go through a short sale have other financial issues, such as high credit card debt or auto loan payments that are higher than they can easily afford. In today’s economy, those issues are, sadly, often coupled with job loss, which means a significant decrease in income or in some cases a complete loss of income.

Even if you only have a small amount of debt, now is the time to think about paying it off, not about how you can take on more debt.

You are in the enviable position of owning your home with no mortgage. Now is the opportunity to take the amount you would have spent on the monthly mortgage payment and put it toward other debts.

If you don’t have any other debts, great! Put what would have been your mortgage payment in a savings account or invest it. Everyone should have at least three to six months of living expenses in savings so that they can weather a financial storm.

If you have savings in place, a financial advisor could help you invest that amount monthly so that the money goes to work for you, rather than just spending it.

Rather than focus on how soon you can take on new debt, think about how to take advantage of having a home with no mortgage debt so that you won’t be faced with the same credit challenges in the future.

Thanks for asking.