Home Equity Line of Credit
We have watched home values soar over the past couple of years, and while it’s tough to predict what will happen next and when there might be a correction, Isabel and I decided it was an opportune time to take advantage of an up-market by creating access to the equity in our home. This is done through a Home Equity Line of Credit, also known as a HELOC. There are a few key principles to understand about this kind of financing outlined below.
#1 – A HELOC is very different from a cash out refinance, another form of financing that allows you to tap into equity in your home. A HELOC is kind of like a credit card in that you don’t receive a lump sum of money – you use what you need if and when you need it and you only pay interest on the amount you borrow, whereas a cash out refinance replaces your existing mortgage with a new mortgage and you receive a lump sum. Cash out refinances tend to have lower interest rates, fixed rates, and are great solutions for long term financing, while HELOCs generally have higher variable rates with a shorter term for repayment. I love the credit card analogy because a credit card can have a massive double digit interest rate while at the time of writing this it is common to find HELOC’s in the 5% range.
#2 – The amount of cash you have access to will depend on the appraisal and what you owe on the property currently, and since the appraisal is such a significant factor, it might make sense to try to get access to that cash during a market when values are high even if you don’t need the cash right away since a higher appraisal brings access to more financing.
#3 – A HELOC can be a great tool for investing. You might find an investment opportunity that can earn you a higher return than the interest you would owe. For example – let’s say you want to flip a house for a profit and you need access to funds in order to do that. Rather than dipping into your savings, you might decide to draw from your HELOC and use the line of credit to hopefully generate a profit.
If you are interested in learning more about home equity lines of credit, please reach out to us and we’ll connect you to some great lenders we know who can do this kind of financing.