Much like a credit card, a Home Equity Line of Credit (HELOC) allows you to borrow against your equity numerously then pay off the balance. You are welcome to borrow 60% – 85% of your home’s equity and the full repayment will be expected throughout 20+years.
Granted, this is a convenient source of cash for big projects. However, the most innovative way to use your home equity depends mainly on the reasoning. The following comparison list will serve as a concise guiding format of what needs to be considered, and you may find additional information in this guide to HELOC loans.
Reasonable Grounds
- Major home repairs and refurbishments: A home is one of an individual’s most significant assets. Most homeowners use a HELOC to refurbish and improve their property to increase its value and build more equity.
- Financial emergencies: If you lose your job or suddenly have an unexpected medical bill to take care of, a HELOC can help you.
- Paying off credit card / Consolidating debt: The justification for this act is that using a home equity loan to pay many high-interest credit card debts means that you will have one low-interest monthly payment to make.
- Real estate investment: you will be committing to debt in exchange for an asset that could potentially create an income. The idea of financial security through property investment is worth looking into. The uncalculated move could be high risk. Consult and consider working with someone who has the experience and the expertise.
Unreasonable Grounds
- College Tuition: HELOCs are often seen as a smart way to fund college. If financial means are scarce, consider attending a community college or taking out a federal student loan. The interest rate for new undergraduate federal student loans is relatively low compared to HELOC.
- Luxury Expense (Car Purchase, Vacations, Weddings): Create a budget for your downtime goal or find a more cost-effective way to travel or celebrate your wedding or graduation party. Suppose there are no financial means to pay for events from your pocket or savings. Rethink your budget and give yourself more time to save.
You can get a loan for your car with a lower interest rate than HELOC with a good credit score. Instead of paying off your car loan for a period of five, you will be liable for the 20-year debt.
- Starting a Business: A business idea always looks good on paper, but the reality is that it is considerable risk with no guarantee. Explore the financial options of an investor or a business loan.
- Investment/ Stock Market: Stock markets and multiple other investment options are seldom steady and straightforward as they are known for fluctuating prices and short-term market downturns. If things take a turn for the left, your house will be collateral, and you’re not only at risk for losing your investment but your home too.
- Daily/Monthly Expenses: Using HELOC to fund non-appreciating costs such as your daily expenses is never recommended. Your home equity is better invested in something that will provide returns on your investment or improve your life.
Before you leap:
- Note that it might be a good idea to get a certified financial advisor or senior wealth manager to advise you on your financial options.
- Carefully consider how your current financial status will be affected, including the payment method.
- Ensure that you are well aware of when the repayment period expires because defaulting can result in foreclosure.
Summary
Although personal loans can be an excellent alternative source, HELOC offers low-interest rates. Since you only pay interest on what you’ve borrowed, it’s flexible compared to other financing options.
