Unexpected expenses or emergencies can be devastating to your finances. One large bill can set you back hundreds, if not thousands, of dollars. Even smaller financial problems, such as a family emergency, can leave you without any way to make ends meet.
However, if you own your house, you have an emergency lifeline surrounding you: the equity in your home. You can tap into this equity with a Home Equity Line of Credit (HELOC) and use the money however you need.
What is Equity in a Home?
Your house has a market value. Depending on several factors, such as the home's location and the state of the real estate market, your home value may appreciate over time. When people talk about home equity, it deals with the current market value of your home.
Most homeowners take out mortgage loans when purchasing their house. The amount of your remaining mortgage is subtracted from the market value of the house. What is left over is the home's equity. You can borrow against a portion of the equity of your home and use the funds however you wish.
Example:
|
Current Market Value of Your Home |
$200,000 |
|
Maximum Line of 90% of Value |
$180,000 |
|
Less: Current Mortgage Balance Owe |
$120,000 |
|
Home Equity Available |
$ 60,000 |
In this example, you would be able to borrow up to 90% of the equity in your home, providing a credit limit of $60,000. The amount of the available equity that you can borrow varies based on your credit and other factors.
Tap into Your Equity with a HELOC
HELOC stands for "Home Equity Line of Credit." Think of a HELOC as a second mortgage being placed onto the house. The lender uses your home as collateral to provide you with the funds you need. With a HELOC, it is similar to a secured credit card since the lender decides on a set borrowing maximum amount (the line of credit limit), such as $60,000.
You obtain this amount for a specific portion of time, typically up to 20 years (varies by lender) and you only pay back the amount you actually spend. So even though your limit is $60,000, if you only use $10,000 to pay off a medical bill, you only have to pay back the $10,000 balance. In addition, you still have the remaining $50,000 to use if you so desire.
For Example:
|
HELOC Limit |
$60,000 |
|
Amount Spent |
$10,000 |
|
Balance Available |
$50,000 |
In this example, you are only required to repay the $10,000 you utilized of your HELOC. You still have $50,000 available should another emergency or unexpected expense arise.
HELOCs offer flexibility as you don't have to use the total amount that the lender provides to you. In addition, they are usually more affordable borrowing options than other types of loans.
First, your primary residence is being used as collateral; making a HELOC a secured loan. Secured loans typically have lower rates than unsecured loans (personal loans, credit cards). Second, HELOCs have longer repayment periods (usually up to 20 years), which helps lower your monthly payment even more.
The Possibilities are Endless
Another great feature about a HELOC is you can use the money for just about anything, such as remodeling your home, paying for college, consolidating debts or even funding events like a wedding or well-deserved vacation.
However, one of the greatest benefits of a HELOC is that it’s available to use when you need it. Should an emergency or unexpected event take place, such as a job loss or medical problem, you’ll have peace of mind knowing you have the funds necessary to make ends meet.
Yet just like with any credit card, make sure to only borrow what you can reasonably pay back as you don't want to miss any payments.
We’re Here to Help!
Ready to explore how a HELOC can become your emergency financial lifeline? We’re here to help answer all your questions and walk you through the entire approval process. Stop by the Credit Union office, contact us at 800-410-0501 or visit lmfcu.org.
Detailed LMFCU Home Equity Line Information