You have a financial ally - it's called your home
With home values rising, more Americans now have more equity in their homes.Posted — Updated
Home values are rising. That means more Americans now have more equity in their homes, and a lot of them are using the monetary value in their homes to secure a Home Equity Line of Credit.
The borrower uses a line of credit to borrow a sum that totals no more than the credit limit. Typically, the market rates for HELOCs are often substantially lower than other borrowing options.
How much credit a person can obtain depends on how much of the mortgage has been paid, as well as the home's value in the marketplace.
Because a home is often someone's most valuable asset, many homeowners use a HELOC only for major purchases or life events.
"A Home Equity Line of Credit gives people options," explained David Jacobs, VP of Consumer Lending at Coastal Federal Credit Union. "The beauty of having it is that it's there if you need it. If you don't, you don't have to use it at all."
What do people use a HELOC for? There are some very common uses.
Many people use a home equity line to pay off high-interest credit cards or loans that are at higher-than-market rates. They can then repay that debt at the HELOC's lower interest rate.
This strategy "allows people to pay off their debt more quickly," Jacobs pointed out. "Often, they can be free and clear in half the time it would have taken to pay off the original debt."
A HELOC can be a good option to finance a college education because the interest rate may be lower, and the maximum loan amount is higher than some other types of education financing.
This is especially true for families who don't have the 18 or so years before college to start saving in a more traditional 529 Plan.
This is one of the most common uses for obtaining a HELOC. It's especially true for people who bought a home they don't completely love and want to freshen the look, or for major home expenses like a roof replacement, electrical updates or additions.
In this case, a HELOC can be especially attractive if the home has risen in value over time, and the investment is going right back into the home.
Other, less common uses for a HELOC include investment opportunities, supplementing retirement income or to pay off medical debts.
Whether or not a HELOC is right for you, depends, of course, on your situation, and how much equity you have in your home.
If you decide to apply for a HELOC, be sure to shop around because not every lender follows the same lending guidelines. For example, some financial institutions may offer you up to 100 percent of the equity you have in your home, or offer other financial incentives like no closing costs.
Better still, the interest on your HELOC may be tax-deductible. As always, consult your tax advisor on this issue.
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