Home Equity Lines of Credit (HELOC)

Heloc Basics, Tips Tricks, and Advice.

Home Equity Lines of Credit (HELOCs) are big topics when people want to access their equity without disturbing their low first mortgage. But - they need to be understood to be best utilized, and always should be used as a part of an overall bigger financial strategy.

Read through this guide and learn more about the Home Equity Line of Credit.

HELOC Basics

A Home Equity Line of Credit or HELOC is like a gigantic credit card that is secured by a homes equity.  HELOCs allow homeowners to access their homes equity without refinancing and make payments only on the amount they borrow.   So if you take out 10,000 dollars you pay interest on 10,000 dollars.  If you pay off the 10,000 dollars and keep a zero balance you pay no interest and the line stays open. 

HELOCS can be the only loan attached to someone’s home, but in most cases they sit in second position behind a first mortgage.  Because they sit behind a first mortgage they are generally at higher rates than first mortgages, but because they are tied to a home, they are generally at lower rates than most consumer debt and have much higher limits.

HELOCs are adjustable and interest only.  Their rates rise and fall as the fed raises and reduces the Fed Funds Rate and you’ll have to add money to the minimum payment in order to pay off the loan.

A HELOC is debt.  As with all debt it should be used sparingly with a plan to pay it off in a reasonably short period of time as part of a bigger financial strategy. 

Reasons to use a HELOC

Number One - as access to liquidity.

A line of credit with no balance requires no payment.  So, I keep an equity line with a large limit on my home in case of emergency, unexpected expenses, and investment opportunities like Real Estate where I can use the equity line as a short term financing option to acquire property as a cash buyer and pay off with long term funds later.   

Number Two - as a Bridge to a new home.

If you are interested in buying a new home but don’t want to sell your old home first, you can take out an equity line and use it for a down payment on your new property.  When you sell your old home, the HELOC is paid off.  Because you used it as a down payment on the new home, your equity is effectively transferred. 

Number Three - as a debt consolidation/elimination tactic. 

Because HELOCs are tied to real estate, generally they have lower interest rates than debt not tied to real estate.  So, HELOCs are sometimes used consolidate debt into an overall lower payment so that debt is more manageable and easier to be paid off. 

Number Four - as access to equity without disturbing a low first mortgage rate.

If you have a home improvement project, or debt consolidation need, one option is to refinance your home and pull out cash. The benefit is generally a fixed rate, but you have to pay on all cash borrowed AND you may need to pay off a low interest rate first mortgage, which is not ideal. An equity line allows you to access equity without disturbing a first mortgage at a low fixed rate.

BONUS - Because HELOCs base their interest cost on daily interest - you can pay off debt QUICKLY by using your equity line to pay all monthly payments - and then depositing your entire paycheck into your equity line as well. If you make more than you spend, you'll reduce your interest expense, and pay all positive cashflow towards debt reduction. Ask me about this if you have goals of paying off debt quickly.

HELOC Tips

Tip #1 -

One of the benefits of a HELOC is that you only pay interest on what is owed.  At the same time, sometimes banks offer lower rates on lines with higher limits because they feel as if the limit is higher it’s more likely they’ll make more interest. 

So one option is to consider taking out a higher limit than you need, and just never borrowing it all.

Let’s say you think you need 25k max for a home improvement project.  Consider taking out a credit line of 100k, and just never borrow that much. Nothing keeps you from only using 25k.  You’ll likely get a better rate due to the higher capacity to borrow, but you’ll never pay interest on any more than what you actually borrow. 

Tip #2 -

 If you plan on moving and keeping your current home as a rental, make sure to get a HELOC in place before you leave. 

Rates, terms and availability of HELOCS are severely limited once you do not live in the home.

So get your HELOC before you leave and you’ll lock in an ability to access your equity.  If you keep the balance at zero you’ll pay no interest. And If your rental needs repairs or there is a gap in rental income you’ll have access to capital as an operating account so you don’t have to use your savings.  

You’ll also have access to capital that could be used to purchase more rental real estate.

If you wait until it’s a rental you’ll be severely limited, if not completely unable to add a HELOC. 

Where can I get a HELOC?

There are a few different ways to go about getting an equity line, and they depend entirely on your goals.

Options run from HELOCs with very low costs, but takes a lot of time and effort, as well as a perfect file to attain - all the way to HELOCS that close in 7 days with no hassle, are incredibly easy to qualify for, but may have inferior terms.

IF you have questions or would like to explore options related to equity lines, Contact Me and I can get you pointed in the right direction.

Here to help in any way that I can!