The Most Creative Ways to Use Capital in Your Home
A home equity line of credit – or HELOC for those of us who like to sound smart – is a fantastic financial tool. If you’ve heard the old phrase that rent is throwing your money away and paying off your mortgage leads to something, HELOC is one aspect of that: a percentage of the house you own), you can get that money out in a variety of ways.
The most common and obvious use of HELOC is in home improvement projects . Kitchen renovations are expensive and many of us don’t have $20,000 to spare, but some of us have been paying off mortgages for years and have a lot of capital. A loan secured by this capital at a reasonable interest rate gives homeowners greater financial freedom.
But home improvement is just one way HELOC can help you. Once you have accumulated a significant amount of capital in your home, you will have a fairly large pool of cash to look forward to. While there is always a risk involved in borrowing money, HELOCs are generally affordable and relatively safe ways to get the money you paid into your home and use it for a wide variety of purposes. Here are some creative ways to use your home equity line of credit.
How to use HELOC to pay off your mortgage
It may sound crazy, but you can take out a home equity loan to pay off your home debt. Yes, you will still have that debt to pay off, but if you can get HELOC at a lower interest rate than your current mortgage and you have enough capital to cover the mortgage, this could be a genius move considering how much you will save on interest payments. HEOCs also tend to be much easier to set up than refinances or second mortgages, with far fewer paperwork.
The downside is that HELOCs are usually variable rate products, so what seems like an amazing deal today can turn into a nightmare in a surprisingly short amount of time. After all, one of the great things about a traditional fixed rate mortgage is stability—the interest rate never changes. This strategy works best if you have a relatively small amount left to pay off your mortgage and you have to be very careful in your calculations, but it’s worth considering if the savings are significant.
How to use HELOC to help you buy a home
You can also use HELOC to help you buy a home. Using a mortgage loan on a home you don’t actually own seems crazy, but it’s an established option called a combination loan , for people who don’t have a 20% down payment or who want to avoid private mortgage insurance (PMI) or a home loan. belonging to the category of “large” loans (which have higher qualifying requirements). Essentially, you take out HELOC to fund your down payment and then take out a regular mortgage as usual. Both loans close at the same time and all that happens is that you enter the house on the first day with HELOC in place.
How to use HELOC to pay with credit cards
If you’ve accumulated tons of high-interest credit card debt, your HELOC can come to the rescue. The average credit card interest rate over the past few years has been between 14% and 15%, and many people have much higher rates depending on their credit score and other factors. goes over 30%.
While HELOCs are usually adjustable rate products (meaning interest rates will fluctuate over time), they will almost always be much better value than credit cards – nowadays you can still find HELOCs for less than 5 percent if you look . Even if those rates double, you can still save money on that credit card debt if you consolidate it using your equity line.
How to use HELOC to make a down payment
There’s something else that most people don’t realize you can use HELOC for: Down payment on other property. As with a combination loan, if you are looking to purchase a rental property or a second home, you can use the equity of your current home to get a down payment in cash. Is moving what will essentially be three liens on two properties a wise financial decision? This is what you will have to find out. But if your numbers are working but you don’t have enough liquidity to take advantage of the property, HELOC can give you the flexibility you need to close the deal.
And if you have enough capital in your current home to simply buy the next one for cash, you can save a ton of time and fees by choosing this route instead of a traditional second property mortgage. This makes your second home offer essentially a cash offer, which can also give you an edge over other buyers.
How to use HELOC to fund a startup
If you have a business idea, no cash to finance it, and a lot of home equity, HELOC can be a quick and easy business loan to bring your idea to life. Obviously, there is a huge risk here: if your business fails, you will have nothing but debt and destroy your net worth and you will have to pay it off. But it’s also a faster and probably cheaper way to fund your startup than a traditional small business loan, and it makes for a great story when you show up on Shark Tank .
How to use HELOC as an emergency fund
Finally, consider the fact that you can open a home equity line of credit without using it. HELOCs do not last forever – they usually have a time limit before they either close or are converted to a fixed or adjustable rate loan. But these timeframes tend to be quite long (10 years is quite common), meaning you can have a large bank of cash ready to use in an emergency. Disaster damage, medical emergencies – every time you need a huge amount of money to get through the storm in your life, HELOC comes in handy. Knowing that you have a pool of money that will cover you in case of any financial surprise will help you sleep at night. And the fact that HELOCs usually cost you nothing once they’re set (in terms of fees) means that if you never use them, the only downside will be the additional debt entry on your credit reports, which can affect for your assessment. and the possibility of obtaining other loans.
There’s a reason why people still prioritize home ownership: the financial benefits are huge. A home equity line of credit is one of the most flexible and powerful of these benefits, if you show a little imagination.