Owning your own home is a quintessential part of the American dream, and for many people their home represents their largest financial asset. But should you leverage the equity you have in your home when you need cash for a major project or to pay unexpected bills?
Before you decide, it's wise to understand the basics.
What is a HELOC?
A home-equity line of credit (HELOC) is a line of credit that's based on the equity in your home. A HELOC is separate from your mortgage. The equity in your home serves as collateral for this line of credit.
How much can you borrow through a HELOC?
The maximum you can borrow is up to almost 90 percent of the current market value for your home. Any amount you owe on your mortgage is deducted from this amount. For example, if your house is worth $200,000, the maximum home equity line of credit would be $180,000. If you have an outstanding mortgage balance of $100,000, the maximum amount you could borrow through a HELOC would be $80,000.
Consider tapping into the equity you have in your home for home improvement projects to maintain — or even increase — the value of your home.
Smart ways to use your HELOC
Tapping into a home equity line of credit can be a great way to access funds using your home as collateral. Interest rates are generally less than a typical credit card. Unlike a personal loan, a HELOC gives you the ability to access money when you need it, keeping your total interest paid even lower. A HELOC can also be a good alternative to a cash-out refinance if your current mortgage rate is lower than today's rates — or if you need to access the money promptly.
Other smart uses for a HELOC include college tuition, which can help improve future earning power for you or your children, or unexpected medical costs, which are necessary and unavoidable.
In some cases, a HELOC can be a great way to consolidate high-interest consumer debt. However, if you would use this freed-up credit to buy more and increase your debt, a HELOC may not be the right choice.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Interest on Home Equity Loans Often Still Deductible Under New Law, IRS.gov, accessed March 4, 2019.
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