Your home may be worth more today than it was after the housing crash of 2007. Especially if you bought your property in 2012 when many real estate markets hit bottom. In fact, there may be a lot of equity in your home that you can tap into. The question is, should you?

What is a HELOC?

A home equity line of credit (HELOC) Is a way of borrowing against the equity in your home. Like your first mortgage, you are using your house to secure the loan. Typically, your HELOC will have a variable rate. This is similar to your credit cards. However, the rate tends to be much lower. 

How HELOCs Work

You can think of a HELOC as a hybrid between a credit card and a mortgage. Like a credit card, the rate is tied to an index. If the index goes up; the rate goes up. If it goes down; the rate goes down. Your starting rate is based, in part, on your credit score. The higher your credit score, the lower your rate. Like a mortgage, you are using your house to secure the loan. Default on the loan and the bank can foreclose on your property.

Best Use of a HELOC

•To Cover a Large Expense

You can use a HELOC to pay a large expense, such as a home improvement project. In fact, it may be more cost-effective to refinance your current mortgage and cash out some of the equity. Or take out a fixed-rate second mortgage. Sometimes a bank will offer a fixed rate if you take out a lump sum after you close on the HELOC. This way, you can use some, but not all, of the credit available to you and pay less interest in the long term.

•For an Unanticipated Expense

You can use your HELOC as an emergency fund. Should there be an unanticipated medical expense or home repair, the interest rate (and thus the payment) will likely be less than if you had to use your credit cards for these expenses.

•To Get Ready to Sell

Making home improvements before you put your home on the market can help you sell the home faster at a higher price. This is a decision you’ll want to make before you list your home. Many banks will not extend a line of credit to you if the property has been listed recently. It is debatable whether you must disclose that you plan to put the home up for sale. After all, the home is not presently listed, and you may change your mind once you lay eyes on your new kitchen. 

•Use It or Pay

Taking out a lump sum of cash at a fixed rate offers peace of mind. You’ll know the rate cannot be adjusted higher. However, if you don’t use the cash, you’ll paying interest on it for no reason. These days, the interest you earn on savings accounts and certificates of deposit (CDs) won’t be enough to cover the cost of holding the cash.

Worst Use of a HELOC

Using a HELOC to buy a new car does not make sense, because you can typically get an auto loan at a lower fixed rate. Some dealerships offer 0% financing for credit-worthy customers. Try to avoid the temptation of using a HELOC for “wants” instead of “needs.” After all, you are putting your house on the line. Only you can decide if the risk is worth a trip to Paris. 

•When You Sell

You’ll obviously need to pay off your first mortgage and the HELOC at closing. The price you can fetch for the house must cover those loans. A good real estate agent can help you determine if your house is worth more than what you owe. In fact, you should consult with a Realtor^® to help you determine how best to prepare your home for sale. When you do sell, make sure that the HELOC is no longer showing up on your credit report. 

It’s Personal

Buying your home is a critical life decision for most people. I believe in the unique, personal nature of real estate. I will carefully guide you through the process of buying your home – or any other real estate investment. Feel free to contact me anytime, whether it’s to get started on helping you realize your goals and dreams, or just to ask a question. I would welcome the opportunity to make a difference for you. Please email me at pthessen1@gmail.com or call 270-796-7550.

-submitted by Perry Thessen