Home values have risen significantly since the Great Recession. Depending on when you bought your home, you may be sitting on a healthy amount of equity that can be put to good use with a Home Equity Line of Credit (HELOC).
With a HELOC, you can apply for a line of credit equaling up to 80 percent of your home equity and use as little (or as much) of that cash however you wish, whenever you wish.
A HELOC is better than a loan because the loan is a fixed amount that you get in one lump sum. With a HELOC, you have constant access to and flexibility with the cash available over the terms set by the bank, usually 10 years. Interest rates are currently near historic lows and are expected to remain that way for a while. You can tap into this equity at little additional cost.
Keep in mind that when you use money off the line of credit, you are using your home as collateral; you risk losing it if you default on the payments. However, with a sound and disciplined strategy, access to this equity can benefit you in many ways.
HELOC Tip #1: Pay off Debt
One common use for a HELOC is eliminating a number of credit card balances, auto loans, or other debt. Figure out the monthly payment and overall cost to pay back the HELOC versus the other debt. With a lower payment, you should be able to apply to the HELOC the extra money that used to go toward your minimum payment.
HELOC Tip #2: Buy an Appreciating Asset
Leverage the low cost to borrow money through a HELOC to create additional revenue streams through cash flow. One way to do this is by purchasing a multi-family residential property.
You can collect multiple rents from tenants while using the revenue to pay down your HELOC and the second mortgage. Do the math to make sure incoming rent can cover your expenses, and that you also have a cash reserve for maintenance, repairs, etc. Once you accumulate enough equity in that first investment property, you can do it again.
HELOC Tip #3: Home Renovation
Another way to create a revenue stream with your HELOC is to renovate your home. Adding square footage, converting existing space such as an attic or basement into living space, or modernizing your kitchen are among the best ways to get the most return on your investment.
HELOC Tip #4: Nothing
We’ve all heard about the importance of having an emergency fund stashed away, but for most of us that is easier said than done. The average American has only $4,830 in their savings account, according to a study by MagnifyMoney. That won’t go very far.
By having an open HELOC and not using any of the available cash, you have an instant reserve fund available for that medical emergency, car repair, or other unexpected expense. And the best part is the repayment will carry a much lower interest rate than most credit cards.
If you plan on taking out a HELOC, make sure it’s for a worthwhile investment. Remember the housing crash of 2007, when many people tapped into their equity to spend frivolously, and in many cases lost their homes. Proceed with caution and wisdom.