Your home is an investment you can use for financial purposes in the future. For example, some seniors 62 and older take out reverse mortgages, while others take out home loans.
But you may find that you need access to extra financing during specific scenarios. That could mean your best option is a Home Equity Line of Credit, or HELOC.
What is a Home Equity Line of Credit?
HELOCs are a hybrid between home equity loans (lump sums paid to you for the value of your property) and a credit card. They provide you with a line of credit related directly to your home equity that you can access to make purchases.
Like credit cards, the borrower has a specific limit (related to their home equity) and pays interest on any payments until they are paid back. Unlike credit cards, however, the average HELOC interest rate is often under 5% depending on FICO score and the amount borrowed, meaning that the borrowed amount is easier to pay back.
The Worst Ways to Use Home Equity Lines of Credit
Before we discuss some of the best ways to use HELOC, let’s talk about some of the worst ways. While a HELOC can be immensely valuable, it should not be used for:
- Living outside your means
- Spending on items with a lower interest rate loan (eg, cars, school loans)
- Putting cash in other investments
Your HELOC is still a form of debt. It should be used sparingly, only when you need it, and – like credit cards – only when you are ready to pay it back.
How to Use a Home Equity Line of Credit
Like a credit card, the HELOC allows you to have access to immediate cash when you need it. It’s a useful tool for:
- Emergency Cash – If you have an unexpected medical or financial emergency that your savings cannot cover, your HELOC can be valuable.
- Paying Off High Interest Debt – Your home equity line of credit often has a far lower interest rate than your credit card. If you have higher interest debt, your HELOC can help pay it off and reduce interest dramatically. But be warned – never use a HELOC to pay off credit card debt if you still have a problem with spending, because if you keep using your credit cards you may find yourself in greater debt.
- Pay for Small Home Improvements – Home improvements can be valuable ways to increase your home’s equity. If you need extra cash to cover the costs of those home improvements, a HELOC can be a useful tool.
Home Equity Lines of Credit can have real value, and help turn your equity into something that works for you. But like all forms of debt, it does require smart decision making, knowledge, and an understanding of your current financial situation. For more about HELOCs, or any type of loans, contact Open Mortgage today!