Should you have a Home Equity Line?

Answer: Generally, Yes.

Also known as a HELOC (home equity line of credit), this type of loan can provide a safety net for you and your family. As someone who is most always averse to non- ROI debt… the reason I say “yes” to a HELOC:

• Outside of the closing costs (appraisal, processing/recording fees, attorney) it doesn’t cost you anything.
• You only owe on the loan if you use some or all of the funds.
• You have flexibility to use however much of the loan desired. It is as simple as writing yourself a check for amount needed.
• It allows you to keep cash funds invested in financial markets without having to sell.
• It provides for maneuverability when buying a home or another investment. For example, you can use the HELOC funds for a downpayment on a home purchase. This is especially useful when you own your current home and are planning to take equity from the sale to apply on purchase. Using the HELOC can make the sale process easier as you do not need to rush on market; you may even be able to choose a more opportune time to sell the home increasing your rate of return. Or, if the home you are purchasing is very competitive you may need to close within 30 days which makes selling your current home ahead of purchase nearly impossible. Once your current home is sold, you simply apply the proceeds to HELOC and your monthly payments go back to $0. The HELOC remains incase needed in the future.
• The rate is generally lower than a credit card or private loan.
• A HELOC helps create liquidity for your asset (home) that is otherwise frozen until sale.
• There is no prepayment penalty.
• Perhaps most importantly, it provides a layer of security for cash access if something unforeseen comes up (ie. medical emergency, job loss).

Things to be cautious/aware of with a HELOC:

• Do not spend the money for personal pleasure (ie. vacations, cars, jewelry; etc)
• Some say to use it for home renovations, but I am against that unless you are doing renovations to increase near term sale value; at which point you will pay off the loan.
• The payments are interest only, so there is no growth on the money.
• Lenders will usually allow you to take a credit line on your primary residence up to a max 85% of the homes value, minus the amount owed on first loan. So, if your home is worth $1,000,000 and you have a $500,000 mortgage the bank may offer a HELOC for $425,000 ($500,000 in equity x .85 = $425,000).
• Only use as much as you need.
• Pay off the money borrowed ASAP.
• There may me a small yearly fee for the HELOC (ie. $25-150)
• If you fail to make payments on the HELOC you risk losing your home in foreclosure.

So, essentially a HELOC is a very low cost option that provides you flexible use of cash and financial security in case of the unknown.