There is this theory that people buy a house in order to achieve the life long adult accomplishment of obtaining “The American Dream.”
Robert Kiyosaki said "Real estate investing even a very small scale, remains a tried and true means of building an individual's cash flow and wealth." Suze Orman was also quoted stating that "owning home is a keystone of wealth, both financial affluence and emotional security." Then there was Andrew Carnegies' bold statistic "ninety percent of all millionaires become so through owning real estate." Ok, ok, enough of the quotes, I think you catch my drift. Sometimes people are patient and wait for this wealth to develop over time, and sometimes people go in with a strategy that helps them leverage their equity along the way in order create even more wealth. Which one is better for you? Thats up to you to decide. It's all about what level of risk you are comfortable with. In my experience its always good to put in some sweat equity and find a property that needs some, or a lot, of TLC. This is why this weeks Real Vocabulary topic is so near and dear to my heart.
Small backstory: My spouse and I found a nice 1882 home located in the heart of the changing neighborhood The Highlands. We spent months looking for the perfect home that had a kitchen off the back of the home so that we could create the living space we had dreamed up. The home we found needed to be gutted beyond the studs. We spent all of our money remodeling the entire thing. Once we were done we knew we wanted to do even more. This is when we discovered the HELOC. This gave us the opportunity to keep going and give us a safety net along the way. Everyone can use these beautiful HELOC’s to their own advantage. Ok, enough about me, lets explain what a HELOC is and some of the benefits.
There is a loan product called a Home Equity Line of Credit, referred to as a HELOC. It is a revolving line of credit that is secured by the equity in your home. It can be used for large expenses, remodels, or to consolidate debt. You’re probably wondering why you would go this route versus the typical refinance. One main reason is because with a refinance payments begin immediately. With a HELOC you only pay on the amount you used. If your HELOC is $50,000 and you paid off a $10,000 credit card, your next months payment would only be calculated on the $10,000 used. A second reason is because the line of credit stays with the home until the line is closed or the home is sold. That means you can keep using it or always have it as a security blanket. Thirdly, HELOC’s typically have lower interest rates than other common loan types (sadly, you used to be able to write off the interest but that changed in 2018 so make sure to consult the tax experts incase this ever changes back).
Like i mentioned in the backstory, I personally used my HELOC for a few reasons, but mainly we got it to finish up some remodel projects. Once we paid it off we kept in case of emergencies (remember you only pay for what you have used, just like a credit card). I think that if you have the ability its a smart idea to look into getting a HELOC in case you lose your job, get injured, or have unexpected bills come up.
*TIP: if you don’t have a job you cant refinance or get a HELOC, you wont qualify. This is why it could be a great idea to get one as soon as your real estate is in a good equity position. You are going to want to consult a financial advisor and tax expert to make sure this is the right move for you.
How Does a HELOC work? Thats a great question! Bank of America breaks it down for us:
“With a HELOC, you’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period (typically 10 years) up to the credit limit you establish at closing. At the end of the draw period, the repayment period (typically 20 years) begins.
Qualifying for a HELOC
To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe. Also, a lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage. ”https://www.bankofamerica.com/mortgage/learn/what-is-a-home-equity-line-of-credit/
A lot of banks and lenders do not offer HELOC’s. Bank of America clearly does and so do many Credit Unions. If this seems like it may be a good option for you please reach out to me and I can get you in touch with some industry experts for you to best weigh your options. You can reach me at firstname.lastname@example.org.