Home Equity Lines of Credit (HELOCs)
Hey everybody, this is Stu at Open Doors FP.
Thank you for joining us today as we explore Home Equity Lines of Credit
To kick this off, what exactly is a line of credit?
It functions a lot like a credit card, but with a major difference.
In both cases, you have a stated maximum amount you can borrow, known as your credit limit, and you're only charged interest on what you actually borrow.
The difference is that a home equity line of credit.
Is backed up by the value of your home.
Because the HELOC is secured by your home value that means you get lower interest rates, nothing like the crazy high rates associated with credit cards. So, think of this as a low-interest credit card with funds that you can access if you need.
A home has value. Shocker, right? But, there's a reason I'm bringing this up.
Often, with these homes comes mortgages.
For example, let's say your home is worth $550,000, and you have a mortgage balance of $225,000, or 50% of your home.
Therefore, you own $225,000 worth of your home, but you can't actually use that value to buy anything or it can't provide funds for you if you have an emergency and you need to access these funds.
A home equity line of credit allows you to access some of that $225,000 in value that you have ownership in, but otherwise can't spend.
We did say you can access some of it but why not all of it?
Well, banks will typically not loan out more than 80%
of your home value as a safety precaution to not over-lend.
So, to add to our example our home of $550,000.
Your equity in that home, what you don't have a mortgage on is $225,000.
And then we say 80% of your home value or 80%
of that $550,000 is $440,000. You take $440,000 minus your mortgage of $225,000 which leaves $215,000 that you may be able to access as a home equity line of credit.
However, typically just from experience, I find most HELOCs typically fall between $50,000 and $100,000.
Will I be at risk of losing my home if I loan it all out?
Great question. You only use what you need. A line of credit is available but it doesn't have to be used unless you actually need it.
Like a mortgage, your home will remain yours so long as you make those minimum repayment requirements of the loan.
So in short, don't borrow more than you can afford to pay back.
If you're not sure what that level is, or just want some extra confidence, be sure to consult a financial planner.
What are some common reasons a HELOC could make sense?
For some of us out there income is not always consistent month to month.
If you earn commissions or you don't meet some production or just there's less people coming in and production happens to be a lower you may need to access additional funds.
If something unexpected comes up financially that you need to pay for but you may not have the money on hand because your paycheck was a little bit lower last month You may not have an emergency fund set up yet.
Ideally, before you worry about using a HELOC for emergency purposes,
you would have an emergency fund set up.
But maybe something happened, it's been depleted or you just haven't been able to set it up yet. A HELOC is a great way to provide emergency access to funds at a low-interest cost, Otherwise, we're relying on credit cards and that's really not ideal.
HELOCs are also a great tool for home projects. If you have to take out another mortgage just to pay for a relatively minor home update, you have a bunch of closing fees and a lot of minutiae and over his head and headaches that you really just don't need to deal with.
A HELOC is a great way to provide.
a reasonable amount of funding without going too high.
But is still a reasonable interest rate.
So for example
Let's say that your kitchen is older than molasses and,
You're just done, right it needs to be updated it's the wrong color you need new appliances it really is out of date but you don't want to pay it all out of cash because you want to maintain your emergency fund. This is a great way to use a HELOC as well.
Thanks for watching everybody that's all I have for you today please check out our short video on the actual mechanics of setting up a HELOC, otherwise if you have any questions please reach out we are happy to guide you through this process.