One of the reasons that people buy homes is so that they can get access to the equity in the homes. Because your home has value, it’s possible to borrow against it in order to meet other financial goals. Using a home equity line of credit can be one way to tap into the value of your home.
What is a Home Equity Line of Credit?
A home equity line of credit is a revolving line of credit based on the value you have in your home. It’s a lot like a credit card based on how much equity you have in your home. If your home is worth $200,000, but you owe $160,000, it means you have $40,000 equity in your home. A bank might be willing to extend you $20,000 in credit, based on the available value in your home.
Because your home equity line of credit (HELOC) is a revolving line of credit, you can draw on what’s available as long as you have room with your balance. This can be an advantage, since it means that you don’t have to reapply for more credit if you want to borrow more. As a result, there are certain uses that are ideal for a HELOC.
When to Use a HELOC
First of all, it’s important to understand the risks that come with using a HELOC. Know that whatever you borrow is secured by your home. If you can’t make your payments, you could lose your home to foreclosure. It’s important that you don’t borrow more than you afford, since you don’t want to put your most valuable asset at risk.
One of the best uses for a HELOC is for home improvement. If you can make some solid improvements to your home, it might improve your comfort in your home, and even help raise the value of the home. If you have an older home, you might need to make repairs and improvements just to keep the value in line with what you paid, and to ensure that your home remains livable. A HELOC can be a good choice for accomplishing this goal.
Pay Off Debt
Another popular use for a HELOC is for debt consolidation and repayment. Because a HELOC is often tax-deductible, and the interest rate is usually relatively low, it makes sense to consider using it to get rid of high interest debt. However, you need to be particularly careful when you take this approach. Even though it can mean saving money on your debt, and paying it off faster, you need to make sure that you can make your payments so that your unsecured credit cards don’t result in the loss of your home.
There are other uses for HELOCs as well. Many people use them for vacations and even to fund weddings. While this can be a way to ease your cash flow, realize that it can also be dangerous for your finances and your home. While you might be able to justify using a HELOC for home improvements that might benefit your home’s value, it’s harder to justify going into that kind of debt — and putting your home on the line — for a vacation.
Carefully consider the pros and cons before you decide to get a HELOC. While it can be a helpful way to tap the value of your home, it’s not always the best option, depending on your circumstances.