Home Equity Line of Credit
A home equity line of credit is also known as a HELOC. It allows you to tap into the equity in your home via a line of credit instead of a loan.
The HELOC Decision
A HELOC might be a good way to obtain some financial flexibility by using the equity in your home for the following reasons:
- You’re not sure of the total amount you need to borrow
- You plan to quickly pay off your borrowed funds
- You want low payments
- You’re unsure what you want to use the money for
The HELOC Process
A HELOC gives you access to a line of credit. It works like this: Let’s say the market value of your home is $250,000 and you owe $150,000 on it. Most lenders will provide a line of credit that when combined with your existing mortgage, does not exceed 80% of your home’s value.
In this case, that would be $200,000. $200,000 minus the $150,000 you still owe leaves you with access to $50,000. That would be your line of credit.
You could use $500 at a time or $10,000 at a time. It’s there for your use as you see fit. If you took $10,000, you’d only pay interest on that amount, not the entire $50,000 available, unless of course, you borrowed up to $50,000.
Your payment would be interest only, making your payments low. While that may be tax deductible, remember, you’re not reducing your equity until you pay off the total amount you the borrowed.
Plus the interest rate on a HELOC will be higher than the one on your first mortgage.
Steve Wyrostek -HomeLoans.org Expert A 20 year plus veteran of the insurance industry, Steve managed departments in the personal and commercial lines areas of major insurers. He’s familiar with how insurance—ranging from boat to workers compensation—works.
