How To Make Use Of The Value Of Your Home
Posted on: 29 November 2018
For most folks who own their houses, having a home is a financial investment. Treating your residence as a financial tool gives you access to money that you'd otherwise not be able to utilize short of selling your place outright. To that end, two major financial instruments, the mortgage and the home equity line of credit (HELOC), have emerged as ways that homeowners can take advantage of the value of their homes for everything from retirement to renovation efforts. You're likely wondering, though, what differentiates the two and which one might be the right choice in light of both your current circumstances and your long-term goals.
Interest Rates
By far the biggest pro of a mortgage versus a HELOC is that a mortgage is subject to a fixed interest rate. Especially when you're looking at paying back a large amount of money on a 15- or 30-year basis, it's good to know that you can depend on knowing exactly how much you'll need to pay in any given year. On the downside, however, someone who took out a 30-year mortgage in the late 1980s, when interest rates were particularly high, likely had to refinance multiple times in order to take advantage of a series of interest rate drops over the first loan's term.
Conversely, HELOC interest rates are variable, moving with the market. In a low-interest environment, that's a good deal, but it presents planning challenges for folks who are on fixed incomes or who simply don't want to deal with the uncertainty.
Size of the Loan
A HELOC is a line of credit that's based on the remaining equity in your house. If you paid $250,000 for your house and have a $200,000 mortgage outstanding against it, then you'd be able to set up a HELOC for the balance of $50,000. Should you need a small amount of money, such as what's needed to remodel your bathroom, a HELOC is an excellent choice. Conversely, those who need to take a large amount of cash out of their home may prefer to go with a mortgage.
Flexibility
A strong selling point for a HELOC is that it provides plenty of flexibility. You can pay it down and continue to maintain, allowing you to keep accessing cash. Someone could use $5,000 of a $50,000 line and still have $45,000 left to guard against an emergency, such as the roof starting to leak.
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