If you’re a homeowner, you probably already know that emergencies happen at the least convenient times.
As difficult as it can be to get the fixes you need when you need them, finding the money to pay for them can be a similar challenge.
The water heater doesn’t break down when you’re just washing dishes. Instead, it waits until you have just stepped into the shower. Your furnace doesn’t decide to retire on a beautiful 60-degree autumn day. No, it waits for one of those sub-zero nights in the middle of January.
If you have equity in your home, one of the best ways to prepare for this challenge is to open a home equity line of credit, otherwise known as a HELOC.
What is home equity?
The equity in your home is the difference between the market value of your home and the amount you owe on a mortgage. Let’s look at an example in which you purchased your home five years ago for $140,000. We will assume you had a down payment of $30,000 and financed for 30 years at an interest rate of 4.25%. We will also say that your home increased in value 3% each year.
Value of home after 5 years with 3% annual inflation ($162,298)
Mortgage balance after 5 years of on-time payments ( 99,889)
Owner’s equity in your home $ 62,409
You essentially own $62,409 of your home with a remaining $99,889 owed to your lender. This equity can be collateral for a home equity line of credit.
Why would I want more debt on my home?
That’s a totally valid question. You should always be careful when borrowing against your home. However, the advantages of a HELOC can make this your best option.
You may initially be drawn into the “HELOC vs. credit card” debate, with HELOC sitting on your right shoulder and credit card on your left. (Not quite the proverbial angel and devil scenario, but you get the idea.)
Most people have a credit card for the types of emergencies identified earlier in this article. However, HELOCs have some advantages over credit cards.
- HELOC rates can be considerably lower than credit card interest rates. If you don’t think you will be able to pay off the debt within the credit card grace period, you likely will be better off with the home equity line of credit.
- You may also save further by gaining a tax deduction for the interest you pay on your HELOC. There are exceptions, but in most cases, home equity loan interest is tax deductible. (See IRS Pub 936 for more information or consult with your tax advisor.) Credit card interest is not tax deductible.
What are other pros and cons of a home equity line of credit?
On the downside, a home equity line of credit takes a little bit of paperwork and time to obtain. That’s why it pays to arrange a HELOC before you need it.
A HELOC may also have some upfront fees associated with it. Fees can vary by lender, as can the percent of your home’s value that you can have available to you in credit. Shop around and find the lender with the terms that best meet your needs.
There is also the concern of borrowing against your home. As too many of us learned just a few short years ago, home values can decrease. You don’t want to find yourself in a position where you owe more on your home than it is worth. That’s why it makes sense for most people to limit their use of a HELOC to those items related to your home. Keeping your home in good condition will help maintain its value.
Finally, some lenders will charge you an annual fee if you don’t use your HELOC. If that’s the case, look elsewhere. Many lenders do not charge this fee.
Most home equity lines of credit allow you to access your credit line by writing a check. While some give you a plastic card when you need to use your line, many people like the idea of not having plastic handy. Carrying a HELOC card around with you may tempt you to use your credit for purchases that may not be the best use of your home equity.
Plan ahead by acting now.
Don’t wait until a home emergency arrives. Apply for a HELOC now so that when that unexpected breakdown occurs, you can just write a check to fund the repairs.
Genisys offers a low-cost Home Equity Line of Credit. To learn about your options, visit your local branch or call our Contact Center on ext. 5
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