When you need money for a big expense, you may want to tap some of the equity in your personal residence. HELOC rates have never been lower and this type of loan enables borrowers to pay only the interest on the part of the HELOC that they actually use. That means that homeowners do not pay interest on the portion they have not tapped. Millions of Americans choose to do so each year, but what are the most popular uses of home equity? Let's review the most popular uses of a home equity line of credit or HELOC loan:
#1 Home Renovations
The top use of a HELOC is to do home renovations, and many experts say that using your home equity for this purpose can make a lot of sense. The logic is as follows: You take money out of your home and make home improvements, which will increase the value of your property. When it comes time to sell, you will realize a nice profit or return on investment. With rates on HELOCs set at the Prime indexes such as the LIBOR, payments are very affordable.
Also, you can use that home equity with a HELOC to make improvements in your home that make it a better place to live right now:
You can leverage your home equity at a very low interest rate (that is tax deductible at tax time) into some very nice home improvements.
If you are interested in investing in the stock market, real estate or business, using home equity can be a good use. It also is growing in popularity. The biggest reason that people use a HELOC loan to invest is that you really cannot get a lower interest rate on money than from a loan on a personal residence.
If you can borrow money from your house at 3 to 4% on today's HELOC loan rates and invest it in real estate or something else and make 9-10%, it can make a lot of sense. Of course, investing money from your home is risky business. Many homeowners got in trouble in the last market crash with investments and lost their homes. You need to be certain that the investment is going to make money. Otherwise, you could end up with a loan on your property that you have to pull money out of your own pocket to pay back.
#3 College Loan
A HELOC may be a good method to finance the education of a child because the interest rate is very low. Also, the maximum loan amount could be much higher than other loan products. However, this type of strategy is not free of risk either. Some parents end up having to delay retirement to pay off this large home debt.
Some homeowners also tap their equity with a HELOC loan to pay off student loans after the child has graduated from college. While this can be a good idea, experts advise caution on risking your own financial security for your children.
#4 Retirement Income
Some people use a HELOC to provide additional retirement income if their investments are not paying as well at present. This strategy can be problematic if the investments do not recover quickly.
#5 Pay Off Credit Cards
Paying off personal debt is a very popular use of a HELOC. Some advisors say that this can be fine, but others advise against it. The problem is that if you have $20,000 of credit card debt that you pay off with a HELOC loan, what is to stop you from running up more debt? A credit card with new credit line of $20,000 can be very tempting for many people. Paying off credit card debt with equity makes sense in the numbers because the interest is so much lower. But taking this step will not solve the problem of incurring high unsecured debt in the first place.
#6 Emergency Fund
A HELOC loan with an unused credit line can be a good alternative to keeping a lot of cash in a bank account for a financial emergency. This strategy can give you plenty of peace of mind because you know if the worst happens, you have a ready source of liquid cash. However, remember that if a major financial crisis occurs and you must use the credit line, this could be a path to foreclosure. This strategy can work fine, but some people find that having an open and available credit line is simply too tempting to pass up.
A home equity line of credit is a low interest rate line of credit that can be a great financial tool if it is used in the proper way. Check today's HELOC rates.
Whatever you use the credit line for, you just need to remember that you have incurred more debt that is secured by your home. You need to pay the loan back sooner or later. In the first 10 years, you probably only pay interest payments, but after that you also must pay back principal. So, be sure that there is a solid financial reason for borrowing that money and you have a plan to pay it back.
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