When (and How) to Use a Home Equity Line of Credit

If you've owned your home for a while, you've probably built up some equity. That's the portion of your home you actually own, not the bank.

• Each month, as you pay your mortgage, some of that payment goes toward the principal.
• That means your equity grows over time.
• If your home's value goes up, that adds even more equity.

I won't get into the details of figuring out exactly how much equity you can use... but I'm happy to connect you with some qualified local lenders who can help answer that question.

So, what can you actually do with that equity?

One option is something called a home equity line of credit, or HELOC.

A HELOC is simply a line of credit that uses your home as collateral.

Think of it like a credit card, but with lower interest rates:

• You get approved for a certain amount, and you can borrow as much or as little as you need.
• You only pay interest on what you actually use, not the full amount.
• If you don't use the HELOC, you typically don't owe anything.

If you borrow from your HELOC, your monthly payment depends on how much you've used and the current interest rate. Unlike a fixed-rate mortgage, the HELOC rate can change over time.

Example #1 - Using a HELOC to Buy an Investment Property

Let's say your home is worth $500,000, and you still owe $300,000 on your mortgage.

Here's how much you could potentially borrow:

Most lenders will let you borrow up to about 80% of your home's value.

• 80% of $500,000 = $400,000
• You still owe $300,000 on the mortgage.
• $400,000 - $300,000 = $100,000 available for a HELOC

So, you could take out up to $100,000 from your home's equity.

Let's say you use $80,000 from that HELOC as a down payment on a rental property.

• If your HELOC interest rate is 8%, and you only pay interest for now.
• $80,000 × 0.08 ÷ 12 = about $533/month (your HELOC payment)
• If your rental property mortgage is $2,000/month, your total monthly cost is about:
• $2,000 (rental mortgage) + $533 (HELOC) = $2,533/month
• If your rental brings in $2,800/month, you'd still have about $267 of positive cash flow each month.

With today's mortgage rates, using a HELOC to buy another property might not give you positive cash flow unless rents are high.

Also, keep in mind that the interest only payment won't pay back that $80K of borrowed money over time - and you will eventually have to pay it off, so you might want to make a higher monthly payment towards the HELOC.

Example #2: Using a HELOC for College

Now, let's say your child's college tuition and housing cost $30,000 this year.

• You borrow $30,000 from your HELOC at 8% interest.
• Interest-only payment:  $30,000 × 0.08 ÷ 12 = $200/month
• That's all you'd owe each month during the draw period - the time when you can borrow and make small, interest-only payments.

But again, keep in mind that you would probably want to be making a higher monthly payment towards the HELOC to be paying that borrowed money back over time.

The Bottom Line

A HELOC can be a smart and flexible tool if you use it carefully.

It's best to use a HELOC for things that build value, like:

• Investing
• Education
• Home improvements

It's not meant for vacations or everyday spending.

Before opening one, make sure you:

• Can handle both your mortgage and a HELOC payment
• Have a plan for paying off what you borrow.
• Understand that the interest only payment might be low but that it won't pay back the borrowed money over time.

If you're unsure how much equity you have, I can help you estimate your home's current market value.  A lender can then help you determine how much equity you could tap into with a HELOC.

If you use it wisely, a HELOC can help you access your home's equity to reach your next goal, all without selling your house.