How Can A Home Equity Line Of Credit Be Beneficial?
A home equity line of credit can be used for numerous items such as debt consolidation or remodeling part of your home. Depending on the financial organization backing the HELOC you may be able to use the funds for other purposes which may or may not be beneficial depending on your definition of the term. As with most financial decisions, a home equity line credit can be put to good use or wasted, so it is important to be smart with the limited funds available so it benefits you financially. Below are some examples of how a home equity line of credit can be beneficial.
Remodeling
Remodeling or renovating your home not only allows you to appreciate it more in the present but also add value which can lead to a higher resale price in the future. Remodeling a kitchen by upgrading cabinets or replacing a linoleum floor with tile or hardwood can be a significant upgrade with a high return on investment. Another upgrade is the bathrooms which many home buyers find essential and can also increase the resale value when placed on the market. It is important to note some home equity lines of credit will only be approved if the funds are used for very specific purposes. Make sure to check for any limitations when getting a home equity line of credit from your bank or credit union.
Debt Consolidation
Home equity lines of credit often have interest rates of between 5% and 7% depending on a length of time for the loan, if there is one, and the credit worthiness of the borrower. A perfect use for a home equity line of credit is to consolidate multiple lines of high-interest credit card debt into a single low monthly payment. For borrowers who have four or five credit cards at 12% to 19% interest, a HELOC can result in significant savings and faster repayment of outstanding excessive debt. The lower interest rate from a home equity line of credit allows more of your monthly credit card payment to be applied to principal instead of interest. There's also the added benefit of home equity line of credit interest being tax-deductible as it is a mortgage expense.
Emergency Cash
It is always recommended if at all possible for families and individuals to maintain an emergency cash fund. Life can throw unexpected situations such as car accidents or medical emergencies at you. Having a few thousand dollars on hand can help overcome unpredictable and expensive obstacles. If you don't have cash immediately available a home equity line of credit can be an invaluable tool to tap the equity in your home and pay for a car repair like replacing the transmission. Again, there may be certain limitations placed on a HELOC by the financial institution so read the fine print and ask questions to see what the funds can be used for.
Conclusion
Owning a home has many benefits and being able to obtain a home equity line of credit can be a wonderful opportunity. Putting the equity in your home to work for you by remodeling or consolidating high-interest rate debt are only a few of the options available. Keep in mind this creates a second obligation on your personal property and if you fail to repay the loan it could lead to liens being placed and possibly foreclosure. A home equity line of credit is just as serious as the original mortgage. It's best not to think of it as a pot of money to use for random purchases but only for necessary emergencies or to invest in something that has long-term benefit.
