The Importance of a Home Equity Line of Credit
Many people are under the impression that they
should never take out a 2nd or a Home Equity Line of Credit on their
home. That is very much the “old” way of
thinking. There are actually a series of
reasons why having a Home Equity Line of Credit can be useful or important.
What is a Home Equity Line of Credit?
A Home Equity Line of Credit is a line of credit
that is tied to the equity in your home.
The bank from which you receive your line of credit through gives you a
checkbook that allows you to access the equity in your home as “liquid”
money. By having a Home Equity Line of
Credit, it does not mean that you are adding to your monthly mortgage. Of course, if and when you do draw from the
equity, you will receive an additional payment for that, but it will be
separate from the 1st Mortgage on your home.
How much money can you access?
Everyone’s scenario is different depending on how
much money they put down on their home when they purchase it, or the price they
paid for the home vs. how much the home is worth in the present time. One person may have a line of credit for
$10,000, whereas another person may have a line of credit for $400,000. It just depends on the individual
situation. However, whatever the limit
you are given is the amount you are permitted to draw on the account.
Why would someone want to draw on their equity?
There are a lot of reasons that people would like
to draw on their equity in their home!
Although you may hear about people running out and spending their home
equity on boats and cars, toys and hobbies… that isn’t recommended, that is a
personal decision. Some people choose to
do home improvements, which is believed to add value to the home, therefore,
using equity to help pay for this may make sense to them. More importantly, the Equity in your home can
be liquid to you in case of emergency situations.
What if you are laid off at work and it takes you
4-6 months to get a new job making about the same amount of income that you did
before? How are you going to afford to
pay your bills and live while looking for a new job? If you do not have enough money in your
savings account to support yourself, then what?
Suppose you used all of your savings for a down payment to purchase the
home that you are in. That way your mortgage payment would be comfortable for you.
Assume that you put down $150,000 on your home. Well, if you put all of your savings into
buying your home, then that money you put down is no longer “liquid” to you in
the case that you would need it. It just
bought down your mortgage. But, if you
have a Home Equity Line of Credit, it would allow you to access the money that
was your savings, and use it as necessary.
Another situation that people may want to access
their equity is for putting children through college, or unforeseen medical
bills. There are things that happen in
life that are not expected or planned, and it is hard to always be prepared for
them. Giving yourself access to your
equity through a Home Equity Line of Credit is important for your safety and for
that “just in case” circumstance – in hopes that you would never have to use it
unless you chose to!
