HELOC Vs. Home Equity Loan

This is the 3rd post in my Articles by Request series. The first two posts were in response to the question "Can you explain how to save money while still raising a family and trying to keep up with what society seems to think a family needs to have?" and are titled Part 1 - The Joneses and Clothing and Part 2 - Living frugally, yet well.

The question was:
"Home Equity Loans. There's two types, the one that refinances your entire house with the loan amount included in it, and the one where you take out a loan but you only draw against it as you need it, and you only have to make payments against the balance you have out. Which is better if you're trying to remodel your home?"

This isn't the easiest article to write, as my main focus is on getting out of debt and not incurring more. First, I must beat down my urge to scream "NO! Don't Do It!!" Ok... that's done.

Second, let me say that I am not an expert on finance or lending. There is a good article about Home Equity Lines of Credit on the Federal Reserve website, that includes information about HELOCs and 2nd Mortgages.

There are no hard and fast rules regarding financing the remodel of your home. If you don't know how much it's going to cost or it is an ongoing project, a Home Equity Line Of Credit seems to make better sense to me. You only borrow what you need, as you need it, and you have a specified amount of time to take out the money. HELOCs also have very few fees, and some lenders have NO fees associated with the HELOC.

If you take out a 2nd mortgage or refinance your home and take out some or all of the equity to finance the remodel, several things are at play. One, you have to pay many thousands of dollars in additional fees and closing costs. When we refinanced our house last year to get out of our ARM, we found out that mortgage companies are allowed to charge up to 5% of the total borrowed in fees and they make the numbers work so that the fees DO add up to that 5%.

Two, you have to anticipate the unexpected and take out enough equity in your home to cover everything that COULD go wrong. If construction costs are higher, or the remodel needs extra work to be brought up to code, or there is more wrong than you anticipated, you have to take out a significant amount more than your original estimate just to make sure you have it covered. Refinancing your house or taking out a 2nd mortgage only to find out that you have to borrow more money later through another avenue is an expensive prospect.

Three, you take out more than you need and end up with more debt than was necessary to complete the project. This isn't the worst problem to have, except that when you borrow more than you need, it's easier to piddle away that cash on things rather than just going ahead and paying it back toward the principal of the mortgage.

For more professional information, the National Association of Home Builders has an article on financing your remodel. I also found some good information on Smart -- and Stupid -- ways to finance your remodel at MSN Money.

However you decide to finance your home's remodeling project, remember that what is right for you and your projects are not necessarily going to be right for everyone. Explore your own options.. and let me know what you find out!

Part 2 - Living frugally, yet well

This is the 2nd post in response to the question: “Can you explain how to save money while still raising a family and trying to keep up with what society seems to think a family needs to have?”

On Friday, I talked about Keeping up with the Joneses (AKA Society) and keeping Clothing purchases from breaking the bank.

To continue that theme, I want to talk a little bit about what Living Well is, to me. I suppose that "Living Well" is as subjective as you can get. It can vary drastically, even within households where everyone really has the same core values. I know that it varies for Wes and I frequently.

To me, Living Well means that I don't have to carry a lot of money stress around with me. It means that my children are happy, provided for, and healthy. It means that our basic necessities are met, with a little extra. Are we there yet? Mostly.

The path to really living well started with a budget. And then, some discipline. There are NO easy answers or quick fixes to getting your finances in order. But, there are definitely some quick wins. For me, the first quick win was understanding that "It's only $10" is a crappy response to buying something you don't need.

Use a free tracking service to load all of your bank accounts, credit cards, and/or gas cards. Mint is fabulous for this! Once you get all of your transactions loaded, review the categories. Make sure they're accurate, and take a good hard look at where you spend your money. Do you spend too much money on video games? Is dining out your weakness? Do you just HAVE to buy expensive crafting materials or the latest magazines to hit the news stands?

The first time I downloaded all of our bank account transactions into Microsoft Money, it was to prepare our taxes. When I categorized our expenditures for the previous year, I found out that we spent FOURTEEN THOUSAND dollars on eating out. That's more than our mortgage!

If you're married, go over the results with your spouse**. Discuss ways to compromise and make changes to your spending. Figure out how to work together to get your financial house in order. Unless everyone is on the same page, there will be sabotage. Sometimes, it'll even be you!
** This discussion should only happen when you're both prepared for it. Don't ambush your partner. No good can come from that.

Once you've determined your spending patterns, work on your budget. Get all of your fixed and mandatory expenses in there first. House payments, rent, and utilities should be at the top of the list. Next, your fluctuating expenses. While you're working out your budget, discuss where you can make cuts without having a negative impact on your household. This can be as simple as teaching the children to turn the lights off every single time they leave a room, to setting a timer for showers, or eating more vegetarian meals to cut meat costs.

Can't go without cable or high speed Internet? Bundle your telephone/cable/Internet packages for big savings on those utilities. Grocery shop with coupons, and use The Grocery Game (my favorite) or Coupon Mom, or another coupon and sales tracking program.

Can't go without eating out? Use the referral link from the Coupon Mom website to go to Restaurants.com. You can get a $25 gift certificate to your favorite restaurant for $10 through Restaurants.com .. and with the referral link from Coupon Mom, you get an extra 40% off. That's a $25 gift card for $6! You can buy more than one, if you choose. Watch out for the restrictions though.

Love books and magazines too much to give up? Go to your public library. They have most of the periodicals you could ever want. There is an endless supply of books. Have kids? GREAT! Go during story time and meet other parents and kids in your neighborhood.

While you're at it, start your own home play groups or a babysitting co-op, so nobody has to pay for sitters. If you aren't that ambitious, look for co-ops that are already in place. Time Banking is taking hold all over the country.

Don't dig the library for your reading fix? Try book swapping or Half.com. Two of the more popular book swap rings are Paperback Swap and Swaptree.

Do you need a shelf or table? What about canning jars? Do you have a bunch of baby clothes taking up space? Extra furniture stashed in the attic that will never see the light of day again? Use Freecycle! There is one in practically every neighborhood. You can find a home for just about everything you have no use for. If you're willing to put a little effort into it, you can also find just about anything you need there too. Can't find what you need on Freecycle? How about Craig's List?

These are just a few of the ways I've found to cut our costs in ways that don't hurt our lifestyle. They do require a little more effort than going out and plopping down your debit card or credit card, but they are worth it to my peace of mind. We're still Living Well. We're just doing it more consciously than we were before. The rewards are growing.

Part 1 - The Joneses and Clothing

Get a cup of coffee and something to nibble, pull up a chair and get comfy. My friend asked for the impossible and I do love a challenge. I recently posted a request for article ideas on my Journal. The first suggestion was “Can you explain how to save money while still raising a family and trying to keep up with what society seems to think a family needs to have?” Well, sure! Why didn’t I think of that? After all, I am trying to save money and raise a family too.

First of all, just who is Society and why should we be keeping up with them? If, by Society, you mean the people who would have you believe you need the latest item to hit the shelves and receive a full media onslaught of advertising, the easy answer is you DON’T need to keep up with them.
-- My children don’t need the latest marshmallow/sugarfest box of cereal to hit the shelves. – Oatmeal and whole wheat versions of no-name cereals work just fine.
-- My husband doesn’t need the newest version of the Blackberry or iPhone. – The phone he has still works, receives his emails, allows him to text and make calls and performs all the functions he needs to for work.
-- I don’t need that new workout suit because I go to the gym now. – My sweats and t-shirts may not be glamorous, but they do the job.

We don’t need to succumb to the peer pressure of keeping up appearances. Paid Twice wrote an article that really resonated with me. In it, she explains that “There is no shame in not being able to afford it.” This article blew me away! How do we let people shame us into feeling like our self-worth is tied to our stuff? As My Two Dollars so succinctly put it, “You are not your stuff.” Do THEY really shame us, or do we do it to ourselves? Do THEY really care?

That said, living well on less money is still possible. Just because you don’t want to “Keep up With the Joneses” doesn’t mean that you can’t live a comfortable life.

Clothing:
It's possible to dress nicely and in name brand clothes for extremely reasonable prices by just changing the way you look at your shopping. There are three ways to do this, in my opinion.

-- If you absolutely must have new clothes, the First Tier, and often most expensive, option is to shop at discount stores. There are great clothes for exceptional prices at Ross, Marshall's, or Burlington Coat Factory's clearance racks. I've shopped at all of them with mixed success.

-- The Second Tier option is to try consignment shops. Plato's Closet has locations in 37 states and is widely known for name brand clothing for a fraction of the price. Many of their clothes still have the tags on them and have never been worn. Another great consignment chain, for children, is Children's Orchard, and they have locations in 22 states.

-- If the Internet is more of your shopping preference, the Third Tier is your option! You can often find fabulous deals at Ebay, Gently Used, or Penelopepup's Vintage Clothing, to name a few. For even cheaper options, you can get clothes, in current styles, for next to nothing at Swango's awesome clothing swap!

I'm an advocate for Tier Two and Tier Three options for clothing, because ReUse is far more effective than Recycle. Keeping things out of landfills should be part of anyone's frugal living plan.

In the next post, I'll be focusing on other areas of (more) frugal living while raising a healthy family. Hang tight, I've got more babbling to do!
Momma

Articles By Request

I posted a request for topic ideas on my other blog. So far, I'm up to three really great topics. I plan to use all the resources at my disposal to write articles on the following topics:

1. Can you explain how to save money while still raising a family and trying to keep up with what society seems to think a family needs to have? (I think this is one series all on its own.)
2. Home Equity Loans. There's two types, the one thatt refinances your entire house with the loan amount included in it, and the one where you take out a loan but you only draw agaisnt it as you need it, and you only have to make payments against the balance you have out. Which is better if you're trying to remodel your home?
3. There seem to be several different ideas about "how" to get out of debt. What are your thoughts on each one, and your opinion of which is best?

There's nothing like a challenge! :) Looking forward to writing on these topics.

What about you? Do you have opinions on any of these topics? I'd love to share them!