Rick and Kathy
Hilton's home equity line of credit.
Rick and Kathy Hilton, parents of Paris
Hilton, recently received
a $10 million equity line of credit on their Bel Air
home. Some are
suggesting this could be a sign of the couple may be in some kind of
financial trouble. They bought the California home in 2005 for just under
$10 million. It is not unusual to receive a home equity line of credit
(HELOC) of up to 80% of your home's equity. That means if
Rick and Kathy Hilton
own their home outright the value of
the Hilton's home must be at least
$12,500,000.00 in order to qualify for the $10,000,000.00 line of credit.
The question remains why would someone want / need a line of credit that
represents 80% of their home's equity.
Some poor reasons to tap into your home equity.
First, keep in mind that taking out a line of credit will temporarily
lower your credit score, just like opening any new account does. Also,
when you write checks against your line of credit you will be responsible
to pay interest on the amount you are borrowing against the line of
credit. Funding vacations, gifts, groceries, and furniture purchases with
interest bearing debt only adds to the true cost of those expenditures.
Also, unlike a credit card which is unsecured debt, a HELOC represents
secured debt. Your home is what secures the debt, and defaulting on the
HELOC could cost you your home.
Some legitimate reasons for a home equity line of credit.
HELOCs are can be used for funding temporary needs, such as paying off
high interest credit cards, making home improvements that will increase
the value of your home, or paying college tuition. Rick Hilton has been
involved in high level real estate sales for a number of years, and short
term funding for a business venture could also be another valid reason for
a strategically made equity line of credit.
Here are 5 tips for using home equity by
Liz Pulliam Weston.
If you believe a home equity line of credit if a good financial move for
your particular situation be sure to make a note of these suggestions
before making a commitment.
1. Keep some headroom. You should try to keep a cushion of at least
20% equity in your home
2. Know what you're risking. A home can be a good way to build
long-term wealth -- as long as you're not constantly draining it away.
3. Know the tax rules. Home-equity borrowing is often touted as
superior to other consumer debt because you can deduct the interest. But
that's not always true.
4. Compare the rates. The rate you'll be offered on a loan or line
of credit depends heavily on your credit score
5. Avoid the fees. If you have decent credit, you shouldn't have to
pay any application or appraisal fees to borrow against your home.