The HELOC That Looks Affordable
The Nguyens have gross income of $140,000 and take-home pay of $8,100/month. Their obligations: mortgage $2,450, two car loans $780, student loans $410, minimum credit card payments $520, and childcare $1,300. They have $4,000 in savings. They want to consolidate $38,000 of credit card debt (average 22% APR) into a home equity line of credit at prime + 1% (currently 9.5%, variable) and use the freed-up cash flow to 'invest the difference.' Their credit score is 690. The HELOC has a 10-year draw and 20-year repayment; closing costs are $1,800. They are also considering a 0% balance-transfer card with an 18-month promo and a 3% fee.
1. Compute their debt-to-income and housing ratios, and assess whether the HELOC consolidation is prudent.
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Front-end (housing) ratio: $2,450 / $11,667 monthly gross = 21% - well within conventional limits (28%).
Back-end (total debt) ratio: ($2,450 + $780 + $410 + $520) / $11,667 = $4,160 / $11,667 = 35.7% - under the 36–43% guideline, so they can qualify. But qualification is not the question; prudence is.
HELOC math: Moving $38,000 from 22% to 9.5% saves roughly $38,000 × 12.5% ≈ $4,750/year in interest, minus $1,800 closing costs - payback in under 5 months. On its face attractive.
The real risks:
- Secured vs. unsecured: The HELOC converts unsecured debt into debt secured by their home. A missed payment risks foreclosure.
- Variable rate: Prime + 1% can rise; the 'savings' narrows if rates climb.
- Behavioral risk: Consolidation only works if they stop using the cards. With $4,000 in savings and a 35.7% DTI, the underlying problem is cash flow, not the interest rate.
- 'Invest the difference' is a myth here: They have no emergency fund and $38,000 of consumer debt. Investing borrowed money while carrying debt is negative arbitrage; the freed cash flow should rebuild reserves first.
Verdict: The rate reduction is real, but the plan as framed (consolidate and invest) is imprudent. Consolidation is acceptable only with a written commitment to stop new card debt and redirect savings to an emergency fund.
2. Compare the HELOC with the 0% balance-transfer card and recommend a sequence.
Read the worked answer
Balance transfer: 3% fee on $38,000 = $1,140 upfront, 0% for 18 months. If they pay it off within 18 months, total cost is $1,140 - cheaper than the HELOC's $1,800 closing plus interest. But: the promo rate expires to a high APR (often 25%+), the credit limit may be below $38,000, and it does not secure the home. Their 690 score may limit the approved limit.
HELOC: Higher upfront cost but a 30-year amortization and lower ongoing rate; secured by the home.
Recommended sequence:
- Do not invest the difference. Direct freed cash flow to a $10,000–$15,000 emergency fund first.
- Use the balance transfer only for the amount they can repay within 18 months - e.g., $20,000 at 3% = $600 fee, with a payoff plan of ~$1,110/month. Do not transfer more than they can clear before the promo ends.
- Keep the HELOC as a backstop, not the primary tool, and only if they have demonstrated they can stop using cards.
- Address the root cause: $38,000 of revolving debt on $140,000 income with $4,000 savings signals a spending problem. A budget and card freeze matter more than the interest rate.
Key judgment: The cheapest financing is worthless if the behavior repeats - they would end up with a HELOC and new card balances.