In a home equity line of credit (HELOC), you get a secured loan with your home as collateral. You can borrow up to a certain percentage of your home’s equity. This facility features a variable interest rate that is usually lower than what an unsecured loan would attract.
The other advantage of taking advantage of a HELOC is that it comes with a highly flexible payment schedule. There are many good reasons to take out a home equity line of credit, including conducting home renovations and consolidating debt.
Below are six tips on how to use a home equity line of credit responsibly:
1. Use a home equity line of credit only when necessary
As much as possible, try not to take a home equity line of credit just because you can. While no one would fault you if you did, it makes sense to be indebted for the right reasons, but not for frivolous things.
By the time you are considering taking advantage of a line of credit facility, you are already in debt. Putting yourself in further debt without a good reason isn’t a great financial decision.
2. Borrow only the amount you need
To use the home equity line of credit effectively, it’s important that you borrow only the amount you need. The home equity loan is financially helpful, but you need to be mindful of how much you borrow. If after evaluating your circumstances you are convinced that taking a home equity line of credit is the best way to proceed, it’s a good idea to avoid borrowing more than you need.
Even if your line of credit allows you enough room for a larger loan, resist the temptation and only apply for the exact amount of funds you need. You see, being indebted can be debilitating if you take a larger loan than you actually need. Justify every dollar you borrow by applying for the exact amount you need.
3. Borrow to consolidate debt
One of the reasons people take a home equity line of credit is to consolidate debt. While the better option is a home equity loan, a home equity line of credit provides you with an opportunity to pay off smaller debts with high interest rates such as credit card loans.
In the end, you are left with one main loan that makes payments that much easier. Among the reasons you would want to consolidate is to enjoy lower interest rates besides simplifying your debt portfolio.
4. Borrow to renovate your home
One of the things you should be looking for is to increase your home’s equity. While this depends on a combination of factors such as the current market prices, renovations have the potential to raise the value of your home.
Apply for a home equity line of credit if you are looking for funds to renovate your home and raise its value. What you plan to do with the facility is more essential than the loan itself, and renovations are a great option, as mentioned above.
5. Borrow to meet an urgent need
Having a line of credit simply means you have access to funds if and when you need them. In life, emergencies happen, and they don’t announce themselves.
While having an emergency fund to cover your expenses for at least six months is recommended, some life situations could make this ideal impossible. In such a case, a HELOC is your best low-interest facility bet. However, you need to have an existing line of credit to benefit from the facility.
Before considering a home equity line of credit to meet an urgent need, make sure it’s a real emergency that cannot be met via another source apart from taking out a loan.
6. Purchase property
The fact that you already have a mortgage does not mean you can’t invest in a new property. As a savvy real estate investor, you can leverage your current home equity to buy another property. While on the face value you are taking out a loan on your current home, the new debt should be a trade-off for another asset with a potentially higher value and more income.
Remember that the real estate market is replete with risks. If you are risk-averse, it might not make sense to take a home equity line of credit to invest in real estate. Ideally, work with someone or a firm with adequate experience in real estate investing to reduce your risks.
The above are smart ways of using a home equity line of credit. There are, however, some bad reasons for applying for a home equity line of credit. These include taking a loan to buy a car, fund a wedding, pay for a vacation, invest in the stock market or cover daily expenses. It’s simply a bad idea to take out a home equity line of credit for these reasons.
Resist using a home equity line of credit just because you have access to one. While it attracts a lower interest rate than a secured loan, it is still a loan nonetheless. Only apply for one when it makes absolute sense in terms of return on investment or when you have a real emergency that you can’t fund any other way.