The Home Equity Line of Credit is the least used and most flexible financial tool available today! A Home Equity Line of Credit (HELOC) is a revolving credit line that uses your house, and the equity in it, as collateral. For many Americans, the largest portion of their wealth is trapped in their houses and their retirement plans. You may find that a significant amount of your wealth is in your house. What is it doing for you? Is it earning a rate of return? Is it making you more secure? Or is it just making you feel more secure?
If you’ve ever been in a situation where you needed access to your equity, you likely found out that it is neither liquid nor accessible. You’ll be glad to discover that a Home Equity Line of Credit is one of several methods that can make your equity available to you whenever you need it. Being house rich and cash poor is a dangerous position to be in.
Let me ask you a question: If you suddenly experienced difficult financial times, would you be better off with $25,000 of cash to help you cover your living expenses, or an additional $25,000 of equity trapped in your home?
Ironically, the events that typically make accessing the wealth in your house a priority make it more difficult to access that wealth, so it is advisable to set up the line of credit long before you need it. By having cash available for emergencies, temporary disability, or unemployment, as well as potential investment opportunities, most homeowners are better off than if their equity is inaccessible.
It is critically important to note that home equity is serious money and it should not be used carelessly or like an ATM machine to purchase depreciating assets or toys, such as luxury cars, watercraft, desert toys, toy haulers, etc… or to fund exotic vacations, as has happened in the past.
However, using your home equity to establish an emergency reserve, to purchase investment real estate, to improve your monthly cash flow by eliminating non tax-deductible debt (so long as you don’t turn around and run up more of the wrong kind of debt), to invest in higher education, or to protect your family can all be very beneficial applications of potentially your greatest asset.
It is better to have access to your equity and not need it, than to need it and not be able to access it. Home equity is not the same as cash in the bank; only cash in the bank is the same as cash in the bank.
A Home Equity Line of Credit is the least used financial tool because it is not typically seen as a financial tool. Most people who open an equity line use the money for things that have little or no financial benefit such as mentioned above.
A Home Equity Line of Credit is very flexible because of the way it is designed. For example, let’s say you open a HELOC for $100,000. You have no monthly payment if there is no balance. If you do use the line of credit, your minimum monthly payment is the accrued interest based on the outstanding loan balance at the end of the monthly billing cycle, not the full $100,000. Additionally, you can access any available funds via a debit card or convenience checks as often as you wish for up to 10 years before a formal 20-year repayment term begins. Another major benefit is the potential tax-deductibility of any interest paid on up to a $100,000 HELOC, according to Section 163 of the IRS code.
Potential drawbacks include the following:
- An adjustable interest rate that is based on the Prime Rate plus a margin (e.g., 3.25% + 1.99% = 5.24%). The margin is typically based on the applicant’s credit score and amount of equity.
- At the end of the draw term the minimum monthly payment will be an amortized payment based on the remaining 20 years, which is made up of interest and principal, so that the loan balance is paid in full by the end of the 30th
- Most, if not all, HELOC agreements contain a little known clause that allows the financial institution to reduce the line of credit at any time, for any reason.
- Many institutions will impose an annual fee to maintain the line of credit. A typical annual fee is $75.00.
Other methods for accessing the wealth in your house are refinancing your 1st mortgage and taking additional cash out or selling the house. Whether you refinance or you open a HELOC you retain use and control of the house as well as the equity in it, and if you sell the house, you gain access and control of the equity, but you lose use and control of the house.
If you have questions regarding home equity lines of credit or any other strategies that can be utilized to increase access to your money feel free to call us.
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