HOME EQUITY LINE OF CREDIT – HELOC
Leverage the value of your home to other products.
All right! Who doesn’t love a good acronym? If you’re like me, you probably think HELOC sounds like it should be a military installation in a Starship Troopers reboot. Preferably written and directed by Joss Whedon. And definitely not starring Shia LaWhere’sTheBeef. Nothing should star that guy. Ever.
But I digress.
HELOC stands for Home Equity Line of Credit, and it’s a way of applying the value of a property to other credit products. Lines of credit are pretty standard products at banks these days – like credit cards, lines of credit allow you to access funds at your convenience, and make payments more flexibly than a typical loan.
If you negotiate a line of credit without a house or lump sum of money in the bank to act as a sort of collateral, the rate of interest you pay will hover somewhere between that of a typical mortgage (sometimes under 5%) and that of a credit card (often upwards of 20% or 25%!).
With a HELOC, however, you’re using your property to guarantee the amount borrowed. The bank or lender then feels comfortable offering more reasonable interest rates.
To calculate the equity you currently have in your home, subtract the principal of your current mortgage from the most recent assessment or evaluation.
WARNING: The following paragraph contains numbers and math and stuff. Not a lot, mind you… We just want to give you time to prepare yourself.
For example, if you owe $200,000 on a $500,000 piece of property, you have $300,000 worth of equity.
- $500K – $200K = $300K
- Evaluation – principal = equity
- Based on this $300,000 in equity, the lender will consider giving you a Line of Credit at a much lower rate than if you applied without the property in the equation.
HELOCs – and lines of credit in general – are a great fit for people who are able to resist the temptation to access the entirety of their credit limit just because it’s there. If you max out your credit cards without a plan for paying them off, or started thinking of a third car or a trip to the Bahamas when I wrote about having $300K in equity, you might want to steer clear of a HELOC.
In short, we don’t recommend using a HELOC to buy toys. You worked hard to build that equity, and it’d be a shame to find yourself up to your eyeballs in debt all over again for some short-term playtime.
If, however, you’re the kind of person who is able to stick to a reasonable budget, a HELOC can be a powerful tool in boosting your household purchasing power.
Whether or not you currently own, a mortgage broker can help you determine your current and potential equity, and a plan to build that number moving forward.