Homeowners who have equity in their home can use it as revolving credit and borrow against it when they use a Home Equity Line of Credit, otherwise referred to as a HELOC. It’s easy to get a HELOC, and it can come in handy when you need quick access to funds at a favorable interest rate.
What is Home Equity?
Home equity is the current market value of your home minus the amount you owe on it. For example, let’s say your home appraised value is $200,000, and you have $80,000 that you still owe on the mortgage. In this case, you have $120,000 in home equity ($200,000 - $80,000). Not sure what the value of your home is? When you apply for a HELOC at Arbor Financial, the application process will include a home valuation which will tell you what the approximate current market value of your home is. Keep in mind that most lenders will only lend up to 90% of the loan to value ratio.
At Arbor Financial, you can have a line of credit using the equity in your home starting at $10,000 and borrow against it, similar to a credit card, only at much lower interest rates than a credit card. You can take advances from your HELOC as often as you’d like, and there are no restrictions on how you spend the money! Plus, you can add optional loan protection that will take over your loan payment if you become disabled, deceased, or unemployed.
Here are 10 common uses for your home equity line of credit (HELOC)
1. Pay for home improvements.
One of the more popular uses of a HELOC is for home improvements, and those that increase the value of your home make using your HELOC well worth it. Just be mindful of what will actually increase your home's value and what projects may not. New paint, hardwood floors, and kitchen improvements are all projects that typically yield increased value, whereas a garage conversion may not. Or, maybe you plan on staying in the house for a while and simply wish to make it more comfortable and attractive by purchasing new furniture.
2. Pay off credit cards or other higher-interest debt.
Debt consolidation is another common use of home equity. If you have credit card debt, then you are most likely paying two or three times the interest than you would with a HELOC. According to Datatrac, on May 1, 2023, the national average interest rate of credit cards was 16.80%**. Rolling your credit card debt into a HELOC could save you hundreds, if not thousands of dollars, in interest.
You must also be cautious when using your HELOC for debt consolidation. Having a solid debt consolidation plan and sticking with it is the key here. Assess why you have so much credit card debt and how you will avoid adding to your debt.
3. Pay for education.
Using your HELOC to help pay for education is an alternative to student loans. Before tapping into your home's equity, evaluate all your lending options to help pay for education, including terms and interest rates.
4. Fund a vacation.
Living in Michigan, you know all about the craving for vacations, especially during the long winter months. If you must borrow money to take a vacation, then tapping into your HELOC is an option. Most financial experts agree that using your home equity for vacations is not prudent, and you could find yourself getting into trouble if you don’t have a plan in place. However, with a solid repayment plan in place, it can be a very convenient option.
5. Cover medical expenses.
Medical expenses can be high, even with insurance. Using your low-interest HELOC may be a good choice. In most cases, you will find the interest rate from a HELOC to be the most competitive rate; since you are borrowing from your own home's equity. However, it makes sense to review your options when it comes to paying for medical expenses.
6. Use as a down payment for a second home.
Ah, so you want a second home, a vacation home, a cottage on the lake, or someplace remote in the woods for that annual hunting trip? Tapping into the equity from your first home could be just what you need to help finance that second home. Before you start to tap into that equity though, you may want to discuss the best strategy for acquiring a second home with an Arbor Financial mortgage specialist. At Arbor Financial, we have several mortgage options to help you get into your first or second home with low to no down payment options while avoiding private mortgage insurance.
7. Use as a down payment for rental investment property.
Tapping into your equity may be the perfect solution to snagging a great deal on a rental investment property. You could use it as a down payment, or in many cases, you could possibly fund the entire purchase with your HELOC. Like any other property purchase, it makes sense to talk to a professional about your lending options. Click here to talk with one of our commercial loan specialists.
8. Use as an extra buffer in case of emergency.
Ideally, you should have an emergency fund with at least three months’ worth of living expenses saved. However, if you don’t have that much cash saved in your savings account, or you need more savings than expected, a HELOC can help create a cushion in case of emergencies. Keep in mind, you don’t need to borrow money from your HELOC if you have one.
9. Use it to help build your credit.
Opening a HELOC may be a way for you to build your credit profile, much like a credit card might. If you are opening a HELOC for this purpose it is important to use it responsibly, make all payments on time, and talk to someone before opening it to ensure you know all the possible benefits and disadvantages.
10. Use it to pay for landscaping.
Using your HELOC to pay for landscaping projects is a great way to help your family get outside more and possibly increase the value of your home. Whether it’s adding a pool for your kids to play, a fire pit for friends and family to gather, or a porch for your new grill and family dinners, a HELOC can help make your dreams a reality.
How to Get a Home Equity Line of Credit
Whether you hold your first mortgage at Arbor Financial or someplace else, you can apply for a HELOC. You have the option to borrow starting at a credit line of $10,000 with a 10-year draw period*. This means you can access your funds at any time in any amount that you’re approved for and only pay interest on the amount that is drawn. Arbor Financial does not have an annual fee for a HELOC, and there is no application fee. However, some closing costs may apply.
Once you apply for a HELOC, a lending specialist will arrange for a home appraisal or home valuation, which will determine your home's market value. Once approved, you will have access to your home equity line of credit!
*Subject to credit approval. An Automated Valuation Model (AVM) will be used to determine equity on HELOC requests amounts less than $75,000. Members have the option to purchase an appraisal at their own cost if they disagree with the AVM value. There are closing costs on the loan that are specific to each member's situation. Subject to change without notice.
**Analysis by Datatrac as of 5/1/2023.