What Is HELOC and How Do I Use It? (Home Equity Line of Credit)

HELOC - Understanding Home Equity Line of Credit Article

Your home is one of the most important investments you will ever make. From the minute you purchase your home, you begin to build its value. In the beginning, most of the value is held by the lending institution but as time passes, your equity will begin to increase. It’s important to know what equity is and how you can use it to your advantage once it has started to increase.

HELOC - Understanding Home Equity Line of Credit Article

What Is “Home Equity”?

Your home’s equity is the value of your investment at any given time. While your home may be worth $100,000, the majority of that equity belongs to the bank. If you put down $20,000 for the initial payment, that will be the amount of equity you have in your home. With every payment you make, your equity will increase (minus the amount of interest).

By taking the amount of money you owe on your home and subtracting that amount from the market value of your home, your equity is the amount that is left.

Raising Your Home’s Value

You can raise your home’s equity in two ways. Making your payments on time will gradually increase your equity. Another way to raise the equity in your home is to make improvements. Adding a new roof or renovating a kitchen or bathroom will also work to increase the value of your home.

As your home’s value increases, so will the amount of equity you have available to you. With proper maintenance and making timely repairs, you will be able to maintain your home’s value and increase your equity.

Harnessing the Equity of Your Home

As the equity of your home increases, you will be able to use it to your advantage. You can continue to let it build over time or you can take out what is known as a “home equity line of credit” (HELOC).

Home equity lines of credit can be used to:

  • pay off credit cards
  • consolidate various types of debt
  • or to pay for home improvements and repairs

To harness your HELOC, you will need to contact your bank and fill out an application much like you did when you obtained your mortgage.

If you meet your bank’s requirements, you will be able to use your line of credit. In most cases, the interest rate is adjustable but you may be able to convert it to a fixed interest rate. Either way, you will have the funds you need to perform needed repairs or consolidate other types of debt. HELOC loans are normally for only a few years so you will be able to start rebuilding your investment in a short amount of time.



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