Top Ways to Use Your Home Equity Line of Credit

Home Equity products can be a great tool to help you achieve your financial goals. But, it is important that you understand how a Home Equity loan and a Home Equity Line of Credit work and some of the most common ways people use them. Going into a decision with this understanding will help you make the best decision for your financial future.

Home Equity is the difference between what your home is worth and how much is owed on the existing mortgage lien(s). For example, if you have $200,000 remaining on your mortgage and your home is worth $500,000, your equity would be $300,000. Many financial institutions place maximum limits on LTV and CLTV.

A Home Equity Line of Credit is an open end first lien or second lien mortgage on your home that allows you to access your equity without selling the home. A Home Equity Line of Credit is considered opened credit because you have a revolving amount of credit that can be used and then repaid multiple times during your draw period. After the draw period, you will then have a repayment period to pay back the remaining balance.

One of the big benefits of a Home Equity Line of Credit is that it generally has a lower interest rate than other types of credit. But, it is important to remember that the interest rate is variable and can change over time which will cause the monthly payments to fluctuate. Defaulting on a credit card will hurt your credit score but defaulting on a Home Equity Line of Credit could result in you losing your home. Common Uses for Home Equity Lines of Credit

One of the best ways to use the equity in your home is to reinvest in upgrades and improvements that make the home more valuable. In some cases, the increased value of the home can eclipse the costs of the improvement over time. Another benefit of using the funds to improve your home is that you may be able to deduct interest paid when using funds to buy, build, or substantially improve the home that secures the loan. If you are considering home projects, make sure the projects will increase your home’s value and consult a tax advisor to explore opportunities to deduct interest paid.

Another good option for your equity could be to consolidate debt with high interest rates. This is a benefit because with all other things being equal, a lower interest rate means that more of your money is going to paying off the principle instead of paying interest. Also, consolidating multiple debts into one line of credit can simplify and streamline your payments. One important thing to consider is that there is a risk in converting unsecured debts like credit cards into a secured debt like a Home Equity Line of Credit. Remember, defaulting on a credit card will hurt your credit score but defaulting on a Home Equity Line of Credit could mean losing your home.

Many people also use the equity in their home to help with expenses associated with higher education. Although student loans are the most common way to pay for college there are often gaps that need to be filled. A draw on your line of credit could be used to help purchase books, purchase meal plans for the year, pay room and board, or help with tuition. This is generally more advantageous when home equity rates are considerably lower than student loan rates.

Lastly, having a Home Equity Line of Credit can give you options in times of emergencies. It is always important to have an emergency fund for cash on hand, but it may not be wise to spend it all at one time. There are also cases where you may have multiple items of equal importance that need to be addressed immediately. In a situation like that a Home Equity Line of Credit could prevent you from having to tap into retirement savings for yourself or college savings for children or other family members.