You’ve seen and heard all the ads: “Get a HELOC Today!”, “Make Your Home Work for You!” or “You’re Sitting on a Pile of Cash!”
They sure are enticing. Some of them can make you feel a bit like a loser if you don’t tap into your home’s equity.
I remember when I got my home equity line of credit. I had a big remodeling project to do — new kitchen counters, tile floor, new windows — and the equity in my house allowed me to do it. I’d never had access to that much money in my life. It felt kind of exhilarating, but a little scary at the same time.
Using your home’s equity to borrow money is a big decision that shouldn’t be entered into lightly. Remember that it has to be repaid and that you’re putting your home at risk should you default on the loan.
In many situations, a home equity line of credit is the best option if you need access to a significant amount of money. Just beware of two important things:
• HOW MUCH you’re borrowing. Can you manage the monthly payment within your budget?
• WHY you’re borrowing. Is this for a specific project or just to have an open line of credit to use whenever you’re running low on cash?
First, let’s look at how much you can borrow. Most credit unions or banks will loan you 80-90%* of your home’s value. Check out this example:
Value of your home $250,000
80% of value $200,000
What you owe on your mortgage $ 75,000
Amount you can borrow $125,000
Unfortunately, just because you can borrow that much doesn’t mean you should. It can be very difficult to pay back that much money. A smarter move would be to figure out exactly how much you need based on what you need it for, and stick to that number. For example:
Master bathroom makeover $15,000
New deck in the backyard $7,500
New landscaping $5,000
Borrow just what you need — $27,500 — so the payments are manageable and you’re not tempted to go crazy and book an exotic vacation or go on a wild shopping spree. Determine an amount and stick to it. Don’t just treat your house like a bottomless bank account!
At the other extreme, if you don’t need a substantial amount of money, getting a home equity line of credit may not be the wisest choice. With this type of loan, there may be several fees associated with it, including fees for the application, a property appraisal, title search, title insurance, etc. The total of those fees may mean that there’s a better loan for your particular needs.
It’s risky to use your home as collateral on a loan so be conservative when you borrow. Be sure to talk to one of our loan officers for some expert advice on whether a home equity line of credit is right for you.
*Don’t EVER go with a lender who offers more than your home’s worth - say 125%. It’s far too easy to put your home in jeopardy.