What Is Home Equity?
Home equity is the portion of your home that you own, in other words it’s the portion that is paid out. For example, if you have a home with a value of $400,000 and there is a mortgage on it with a $150,000 balance, the remaining $250,000 is your home equity. Having substantial home equity in the home can serve as a great investment because real estate values tend to increase significantly over the long term. If you are currently renting then you do not have home equity, you are simply leasing a home from someone who does have home equity.
When you sell your property, the remaining proceeds after deducting the mortgage, real estate fees and other expenses is what’s left as your home equity.
Home Equity Line of Credit
It is common to get a line of credit against the equity in your home. The home equity will serve as the security for the line of credit in case you default on your payments. This security provides for a much lower interest rate than on a regular unsecured line of credit.
The maximum is 80% loan to value, for example, if your home is free and clear (in other words fully paid off) and is worth $400,000, then you may apply for up to $320,000 equity line of credit. The actual approved amount will be based on other criteria, such as your income, existing debt etc. (see requirements below) However if your home is worth $400,000 and has a $100,000 mortgage, then the maximum you can apply for is $240,000, which is 80% of the equity available.
Best Uses of the Home Equity Line of Credit
Our homes are crucial to us because we put a lot of work, effort and dedication to obtain them. That is why the home equity line of credit shouldn’t just be used for anything. It should be used for good debt. Below are just some examples
- Education – whether it’s your undergraduate degree, masters, Phd or any other accreditation, education is a life long investment and should help you earn more money in the long run, prior to funding your or your children’s education with a line of credit find out about the government programs (RESP) and student loans at your dispense
- Rental property – real estate investment can be very fruitful, especially in the long run, rental properties can generate great return on investment if the tenant’s rent is more than what the mortgage payment is
- Home renovations – investing into your own home can save you in other costs, for example purchasing energy efficient appliances may save on energy bills, changing the windows can also help keep the heat from escaping in the winter etc.
- Assets such as a car, home appliances, a boat – all these items, although are not investments, are considered to be fixed assets, meaning they can serve great purpose in your life (i.e. a car gets you to work and home, which in turn also saves you time), additionally these items can be resold
The reason why the HELOC shouldn’t be used for day to day purchases is because the debt can add up very quickly, therefore it may be difficult to pay off if not planned carefully.
Qualifying For The Home Equity Line Of Credit.
The general requirements to qualify for a home equity line of credit are the following, requirements may vary by bank/financial company:
- good credit score
- sufficient income with proof
- sufficient equity in home
- low/no debt