What is home equity line of credit or HELOC?
If you have used a credit card, you'll easily understand the concept of the home equity line of credit or HELOC. In simple term, a HELOC is a revolving credit, like the credit limit with your credit card. The difference is that a HELOC uses your home's equity as a collateral. Basically, it's a credit card secured with your home's equity.
And what is home equity?
Home equity is the difference between what your home market value and the total home mortgage you owed. For example, your home is now worth $1 million, and you have a home mortgage of $300,000. So in this case, your home equity is $700,000.
Most banks do not let you borrow 100% of your home market value. The most I've seen are 90% and 95%.
How much home equity line of credit can you qualify for?
The qualification is very similar to qualifying for a home loan. You still have to show proof of income, good credit score, appraisal, etc. The general rule to figure out how much you qualify for is 80% of your home equity.
We'll use the same example we used earlier. So your home is worth $1 million in the current market. 80% of that $1 million is $800,000. We then subtract your current outstanding mortgage of $300,000. Therefore, you qualify for up to $500,000 in HELOC, given you meet income and credit score requirements.
What Can You Use a HELOC for?
You’ve probably hear many times radio or TV advertising HELOC to finance your dream vacation, wedding, dream car, dream wedding, etc.
You should see me roll my eyes when these advertising show up…these are the worst way use the money.
First of all, when you borrow money to buy things that do not return money, that’s bad debts. You’re digging a hole for yourself.
A better use of the HELOC is to pay of your bad debts, such as high interest credit card balance, car loans, college loans, etc.
Even though the bank generally does not want you to use the money for real estate investing (because they think any investing is risky), but that’s the way to go.
I purchased my first rental property with a HELOC from my primary residence. And my rental property is making money for me while I’m sleeping, and the equity is of course growing every day like a healthy child.
Some banks may allow you to refinance your existing home mortgage into a HELOC. This is a rare strategy that not many people know of.
You can technically use the HELOC to pay off your mortgage in 5-7 years . I’m serious, no kidding…
Many local banks and federal credit unions offer very enticing introductory rates.