TRICKS OF THE TRADE
Home Equity Line of Credit (HELOC)
Prepared by Ryan Keefe* and Michael Menninger, CFP, Financial Advisor
With a Home Equity Line of Credit (HELOC), homeowners today have a unique and versatile tool at their disposal that most do not utilize or even know about. A HELOC is a secured line of credit that allows a homeowner to access some of the equity they have accumulated in the home. Most banks will offer HELOCs up to 70%-80% of the value of the home including the mortgage balance, with some even going as high as 90%. In this article, we will be looking at some creative uses of a HELOC and how to best utilize this tool to help meet your financial goals.
One utilization of the HELOC is to consolidate and pay down debt. Since HELOCs are secured (backed by an asset) lines of credit, they generally come with lower interest rates than most unsecured loans, i.e., credit cards. By taking money out of the HELOC to pay off higher interest loan(s), one can reduce the amount of interest they pay over-time and be able to pay down their debt quicker. If one doesn’t have debt, another use of the HELOC can be to serve as an emergency reserve. This can take the pressure off of one’s savings account, which in today’s environment earns very little interest, and allow that money to be invested- where hopefully that money can earn enough interest to outpace inflation.
Another popular use of the HELOC is using it to avoid paying Private Mortgage Insurance (PMI). When young homeowners go to purchase their first home, many of them do not have enough cash to put a 20% down payment on the fair market value of the home. With Federal Housing Administration (FHA) loans allowing someone to put as little as 3.5% down, homeowners need Private Mortgage Insurance in order to receive a mortgage as a condition by the lender. PMI varies based on the loan amount, and generally will come out to around $100-$300 per month extra. By using a HELOC to pay up to 20% of the fair market value of the home, one can avoid these PMI payments and use the money to pay back the HELOC and increase equity in the home.
Finally, if you find that next dream home but are still trying to sell your current residence in order to finance the down payment, one could use the HELOC from the current residence as the down payment. Then once the current residence is sold, by rule the HELOC will be paid off at settlement. This way one doesn’t have to go and borrow money from their 401(k) or other savings, and know that the HELOC will be repaid as soon as the current residence is sold. If you have any questions regarding HELOCs and how to best use one to pursue or work towards your financial goals, please reach out to Menninger & Associates, Inc. at 610-422-3773 or visit our website at www.maaplanning.com.
*Ryan Keefe is a non-producing registered representative of Cetera.