FINANCE WHAT IS A HOME EQUITY LINE OF CREDIT? As homeowners pay off their mortgage over time, they’re also building up home equity, and acquiring the financial flexibility it can provide. If you have a significant equity stake in your home, generally at least 35 percent or more, you can tap into that value with a home equity line of credit (HELOC). What is a home equity line of credit? Like a credit card, a line of credit provides revolving access to a fixed amount of cash. You borrow what you need from that total and pay it back over time, plus interest. Say you have a line of credit worth $75,000 and borrow $15,000 to fund a major purchase. You still have $60,000 left to use, and that amount increases as you pay back the borrowed funds. There’s no interest on funds you don’t borrow from the line of credit, and the fees and costs charged for a HELOC are typically lower than for most types of loans.
Use a HELOC to increase the value of your home while also raising your equity stake A renovation project that increases the market value of your home will, in turn, give you greater home equity. Whether it’s a new kitchen or bathroom, finishing a basement, or even adding a backyard pool, there are countless ways to make your home more marketable, boosting its value and the value of your equity stake. If you want to renovate but don’t have the savings to pay for it, you could finance the project by borrowing against your home equity, making use of your ownership stake while simultaneously increasing the home’s value.
When not to use a HELOC In general, it’s wise to steer clear of using a HELOC if your income is unstable or inconsistent, threatening With a home equity line of credit, the maximum your ability to make regular payments. amount the homeowner can access is usually a A HELOC is also not the best option if set percentage of the home’s value, generally you don’t need to borrow very much between 60 and 80 percent, minus the amount money, as it would likely be cheaper still owing on the mortgage. For instance, if your to use your savings and avoid the costs home is worth $500,000 and you owe $175,000, and fees involved with a loan or line of you could access up to $225,000 (500,000 x .8 = credit. 400,000 - 175,000 = 225,000). Finally, if you’re thinking of getting Unlike credit cards, interest rates are typically a home equity line of credit, run the low on home equity lines of credit, because numbers first to make sure you’ve got they are secured by the property itself. The the financial bandwidth to withstand consequence, however, is that your lender has the bigger payments you’ll have to a claim to your home if you are unable to repay make if interest rates go up. HELOCs your debt. As such, it’s wise to avoid borrowing typically have variable interest rates, too much against the value of a property and meaning the interest charges will rise running the risk of losing your home. and fall over your borrowing period, altering your repayment amount from What can a home equity line of credit be used month to month. for? A line of credit is like having a financial This article is not intended to provide security blanket you can use for any expense, financial or financial planning advice, please unexpected or otherwise, that’s too big for your call or email Moya Financial and they will be more than happy to chat with you! savings to handle. A home equity line of credit can be a great way for homeowners to pay for home improvement and renovation projects, major purchases such as a vehicle, medical or education costs, to fund investments, or to cover emergency expenses. 6
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