A home equity line of credit – or HELOC for those of us who like to look smart – is a fantastic financial tool. If you’ve heard the old phrase that paying rent wastes your money, but paying off a mortgage helps something, a HELOC is one aspect of it: once you’ve built up the equity in your house (essentially the value of the percentage of the house you own), you can withdraw that money in a variety of ways.
The most common and obvious use of a HELOC is for home improvement projects. Kitchen renovations are expensive and many of us don’t. have a reserve of $20,000 hang out, but some of us have have been making mortgage payments for years and have plenty of equity. Borrowing against this equity at a reasonable interest rate gives homeowners great financial freedom.
But home improvement is just one way a HELOC can help. Once you have built up significant equity in your home, you have a fairly large reserve of cash to draw upon. Although there are always risks in borrowing money, HELOCs in general are affordable and relatively safe ways to tap into the money you’ve poured into the house and use it for a variety of purposes. Here are some creative ways to use a home equity line of credit.
How to use a HELOC for pPaying off your mortgage
It may sound crazy, but you can borrow against the equity in your home in order to pay off your debt on the home. Yes, you’ll still have that debt to pay off, but if you can get a HELOC for a lower interest rate than your current mortgage, and you have enough equity to cover the mortgage, that could be a hit. genius considering the amount you’ll save on interest payments. HELOCs also tend to be much easier to set up than refinancing. or second mortgages, with much less paperwork.
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The downside is that HELOCs are typically variable rate products, so what seems like a great deal today could turn into a nightmare in a surprisingly short amount of time. After all, one of the great features of a traditional fixed rate mortgage is stability: the interest rate never changes. This strategy works best if you have a relatively small amount left on your mortgage and need to be very careful with your calculations, but it’s worth considering if the savings are significant.
How to Use a HELOC to Help You Buy a Home
You can also use a HELOC to help you to buy a house. Using a loan against a home you don’t yet own seems a bit crazy, but it’s an established option called a Combined loan for those who don’t have 20% down payment, or who are looking to avoid private mortgage insurance (PMI) or a mortgage classified as a “jumbo” loan (which have higher qualifying requirements). Essentially, you take out a HELOC to fund your down payment, then take out a conventional mortgage as usual. Both loans close simultaneously and all that happens is you walk into the house on day one with a HELOC in place.
How to use a HELOC for pno credit cards
If you’ve racked up tons of high-interest credit card debt, your HELOC can come to the rescue. The average credit card interest rate was around 14 to 15% for a few years, and many people have much higher rates based on their credit score and other factors—some credit cards designed for people with uneven finances have interest rates that can reach more than 30%.
Although HELOCs are generally adjustable rate products (meaning the interest will fluctuate over time), they will almost always be a much better deal than credit cards – currently you can still find HELOCs for less than 5% if you look. Even if these rates double, you could still save money on that credit card debt if you consolidate it using your equity line.
How to use a HELOC for ma down payment
Something else most people don’t realize, you can use a HELOC for: A down payment on another property. Like a combo loan, if you’re looking to buy a rental property or second home, you can use the equity in your current home to make the cash down payment. Is carrying what would essentially be three liens on two properties a wise financial move? This is something you will need to understand. But if your numbers are working but you lack the cash to take advantage of a property, a HELOC can give you the flexibility you need to close the deal.
And if you have enough equity in your current home to buy the next one with cash, you can save a lot of time and expense by going this route instead of a traditional mortgage on the second property. This makes your offer on the second home essentially a cash offer, which could also give you an advantage over other buyers.
How to use a HELOC for fand a startup
If you have a business idea, no money to fund it and lots of equity, a HELOC can be a quick and easy business loan to get your idea off the ground. There are obviously huge risks here – if your business fails, you will only have debts to show for it, and you have wiped out the capital you had and you will have to pay it back. But it’s also a faster and probably cheaper way to fund your start-up than a traditional small business loan – and it makes for a great story when you show up on shark tank.
How to use a HELOC like an eemergency fund
Finally, consider the fact that you can open a home equity line of credit without using this. HELOCs aren’t forever – they usually come with deadlines before they close or convert to a fixed or adjustable rate loan. But these durations are usually quite long (10 years is quite common), which means you can have a big pot of cash ready to use in an emergency. Damage from natural disasters, medical emergencies – whenever you need a huge amount of money to weather a storm in your life, a HELOC will come in handy. Knowing that you have a reserve of money that will cover you through everything surprise will help you sleep at night. And the fact that HELOCs generally cost you nothing once they’re set up (in terms of fees) means that if you never use them, the only downside will be additional debt entering your credit reports, which could impact your score. and the possibility of obtaining other loans.
There’s a reason people always prioritize owning a home: the financial benefits are enormous. A home equity line of credit is one of the most flexible and powerful benefits, if you use a little imagination.