|What is a HELOC and how can it help you?
Do you know how much equity you have in your home? This is a very important thing to stay on top of and NO this is not the zestimate on Zillow!
Equity is calculated by taking what your property is worth and subtracting what you owe. Understanding your equity is essential because it allows you to leverage funds those and borrow against the value of your home. Most banks will lend you up to 80% of the value in your home. So if your home is worth $300,000 and your mortgage balance is $200,000- then your equity is $100,000. If the bank is willing to lend you the 80% of the value ($240,000), that would mean you have about $40,000 of available funds after subtracting the $200,000 still owed on the mortgage.
Some common uses of a Home Equity Line of Credit include- making improvements to your home, purchasing an investment, emergency funds, or helping you purchase your next home. My clients utilize a HELOC when they might not have enough cash to put down on their next home without selling their current home. In this market, it is a lot easier to sell a home than to be a buyer. A HELOC can also serve as bridge financing, providing you with the funds needed to cover the down payment and other costs of the new home before listing your current home. Once the current home is sold, you will use the proceeds to pay off the HELOC.
HELOC costs are minimal. You will need to pay for an appraisal and a few recording fees. The best part about a HELOC is that you will only pay interest on what you are actively borrowing. You can put a HELOC in place and not pay anything for years until you need it. Once you pull some money from this HELOC, you will make a monthly payment for the interest on the money you are borrowing. If you are borrowing it to purchase your next home, the HELOC will only be open for 4-6 weeks while you prepare and sell your previous home.
It is very important to put a line of credit in place before you list your house. Additionally, if retirement is on the horizon for you, I would strongly recommend putting this line of credit in place before you officially retire. Banks typically want to see that you have sufficient income to make the payments, even if you plan to pay off the HELOC quickly after securing your next home. I often see my retired clients in the unfortunate situation where they own their home outright but cannot access all of that equity because the bank will not approve them for the full amount due to not having enough income.
A HELOC can be a valuable financial tool to tap into the equity of their home and use the funds for various purposes. However, it’s crucial to carefully evaluate your financial situation, including your ability to repay the HELOC, upfront costs, and potential fees, before proceeding with a HELOC. Consulting with a financial advisor or mortgage professional can help you make an informed decision and ensure that a HELOC is a suitable option for your real estate goals. If you need a recommendation for a trusted lender or have any other questions about your next Real Estate move, please contact Team Trimble!