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A home equity line of credit (HELOC) is a way for homeowners to gain access to funds by securing their mortgage against the loan or line of credit. By leveraging the equity in your home instead of your credit rating and assets, you can receive more money and a better interest rate.

Here are some tips on getting a good deal on your HELOC.

Shop Around

Often, lenders offer different terms based on an application. This can include different penalties or fluctuating introductory rates. It’s smart to speak with a variety of lenders and institution to get a sense of the different deals and then decide what is best for your financial situation. When you home is being used as collateral, it’s worthwhile to exercise more due diligence.

Once you’ve chosen a lender, be sure to ask about how the rate can change, especially if you are taking advantage of an introductory rate. In addition, inquire as to whether your rate will fluctuate with prime or if it is fixed.

Do you Have Enough Equity? 

Your equity in your home determines the loan or line of credit amount you can receive. It can also influence the interest rate.  The simple formula is comprised of approximately 75% of a home’s value (determined by an appraiser) minus the amount owed. Some lenders will go as high as 80%. Ultimately, this formula ensures that you don’t borrow more than the value of your home.

The less you owe towards a mortgage, the more you can borrow against the value of your home. You might want to wait until you have enough equity.

Spend the Money Wisely 

You want to use a HELOC for very specific reasons like education, medical or home renovations. For those with market savvy or business aspirations, using the money to invest or to start a business is common.

Whatever the money is used for, pay it back immediately. Like any loan or line of credit, this will limit the amount of interest you pay, and can help when applying for this product in the future.

A HELOC is a great way to fund certain aspects of your life or to increase cash flow. Putting more effort into your application and understanding the process will go a long way to making sure you enjoy the benefits of this financial product.

If you’re unsure of how you’ll secure a loan, you may not have to look any farther than your home equity. In many cases, a home equity loan will be the cheapest kind of loan. They are also easy to get approved for in many cases.

A home equity loan comes in one of a few forms:

• A second mortgage
• Home equity line of credit (HELOC)
• A reverse mortgage

Reasons Home Equity Might Be The Best Choice

Cheaper

Home equity loans are seen as less risky from your lender’s point of view. Securing a loan with your home equity will usually lead to low interest rates. HELOCs are particularly inexpensive and are a great way to pay for large expenses at a relatively low cost.

Readily Available

Not everyone has access to other collateral to secure loans with. But if you own a home and have at least 20% equity in it, you have a valuable financial asset. The closer you are to having paid off your mortgage, the easier it will be for you to secure a loan.

They Have Many Uses

Unlike many other loan classes, you aren’t very restricted with how you spend your funds. When you take a home equity loan you can use the funds for a wide variety of expenses. The most obvious reason would be to make improvements to your home. But there are several good reasons (and many bad reasons) to secure a loan with your equity.

Good Reasons To Secure With Home Equity

Home Improvement

Using your equity to secure a home improvement is a straightforward financial choice that makes perfect sense. Why wouldn’t you use your home equity to improve your home and increase its value? Tapping into your equity to secure a loan allows you to produce even more equity, or to sell your home at a great profit.

Starting A Business

If you’ve come up with a great business idea, you may want to start a business. But starting a business is difficult, not to mention expensive. This is where a HELOC can help.

A HELOC is a line of credit that allows you to control how much money you want to borrow and when you want to borrow it. Business is inherently risky, so it’s good to have control over your borrowing.

Consolidating Credit Card Debt

Consolidating higher-interest debt is a financially sound reason to tap into your equity. Credit cards make it far to easy to rack up more debt through high interest rates. Rates are notoriously high for credit cards, with most starting at 19%. Some credit cards go as high as 29.99%.

You can use your equity to secure a debt consolidation loan. You would then use the loan to immediately pay off all your credit card balances. The result is you have one large debt to pay off instead of many smaller ones. But your interest rate on a home equity loan will usually be far lower than the rate on your credit card. That means you can save a lot of money and save your credit score at the same time.

Retirement

There is one way to tap into your home equity that stands out for its retirement benefits. A reverse mortgage can help you afford retirement through a repayment-deferred loan. If you’re simply short on cash for retirement, a HELOC is likely your better choice.

Emergencies

If you run into an emergency, none of the options you have will be great. But if you have emergency expenses, your home equity can enable you to pay for them. If you don’t have many other options, a home equity loan is an inexpensive alternative to credit cards or other fast personal loans.

Education

Education expenses are one of the major reasons people take home equity loans. Education is expensive, so you only have a few options for financing. A HELOC or second mortgage can be a good alternative to student loans.

What You Need To Consider

If you have equity in your home, you have the ability to get a good loan. But regardless of the size of your loan and what you’re using it for, you need to perform your due diligence.

The Value Of Your Home Can Decline

If you’re taking a home equity loan to cover your home improvement costs, you won’t necessarily see a significant return. No matter what you do, some forces are beyond your control. External factors can cause the value of your home to drop, even if you work to make it a nicer place to live.

You Still Have A Limit

Many of the uses of home equity loans will save or make you money. Other uses should be approached with caution. Frivolous personal expenses shouldn’t be covered with loans secured with your home equity. Some may claim that an expensive wedding or vacation can be paid for with a home equity loan. While it’s a possibility and a cheaper option, it’s better to save your equity for the expenses that can improve your life long-term. If you’re not careful, you can overspend and put your home at risk of foreclosure.

Securing a loan with your home equity is one of the easiest ways to get low interest rates. If you need a lot of cash, it’s a great way to use your most valuable asset (your property) to secure a loan.

While tapping into your home equity may seem attractive, you need to be careful. Home prices are higher in Canada than ever before and rising quickly, which makes home equity more plentiful. But if you aren’t careful, it’s your property that’s on the line after all. There are a few things you need to keep in mind if you want to use this powerful tool.

What You Need To Tap Into Your Equity

Using your home equity is fairly easy. But you will need to meet a few minimum requirements before you’re able to.

Equity

First, you’ll need to have sufficient equity available. Most lenders will need you to have enough to justify a loan. A good rule of thumb is to only consider tapping into your home equity if you have at least 20% in your home.

Credit Score

Lenders will have their own minimum credit score requirements. If your credit score is in the mid-600s or higher, you will have many opportunities for loans with lower rates. But having a lower credit score won’t necessarily hold you back. Lower credit scores will usually just mean higher APRs for your loans.

Debt-to-Income Ratio

Lenders want to see a reliable source of income for their borrowers. But they also want to make sure you’re not already struggling with debt. So, they’ll have a look at your debt-to-income ratio. If your debt-to-income ratio is lower than 40%, it shouldn’t stop you from tapping into your equity.

To be safe, it’s best to not take on significant amounts of debt. Unless you’re consolidating debt, if your debt-to-income ratio is already high, you might want to think twice.

Have A Good Reason

The best safety tip for tapping into your equity is to make sure it pays off. There are several ways you can ensure you’re getting an excellent deal. Frivolous spending with borrowed money is unsafe in many circumstances, not to mention pointless from a purely financial point of view. The goal is to produce a net gain for yourself.

Consolidating Credit Card Debt

Consolidating higher-interest debt is arguably the best reason to tap into your equity. Credit cards can easily set you up for a rough time if you don’t pay your balance at the end of the month. Credit card interest rates are notoriously high, with most at 19%. Some credit cards go as high as 29.99%.

You can use your equity to secure a debt consolidation loan. You would then use the loan to immediately pay off all your credit card balances. The result is you have one large debt to pay off instead of many smaller ones. But your interest rate on a home equity loan will usually be far lower than the rate on your credit card. That means you can save a lot of money and save your credit score at the same time.

Home Improvement

Using your equity to secure a home improvement loan is another move that just makes sense. When you make improvements to your home, you add value to it. That’s why tapping into your equity to allow you to sell your house for a much higher price just makes sense!

If your current equity allows for it, you can add a basement or another addon to your property. With the value this creates for your home, you could sell it for more.

Retirement

There is one way to tap into your home equity that stands out for its retirement benefits. A reverse mortgage can help you afford retirement through a repayment-deferred loan.

If you’re simply short on cash for retirement, a HELOC is likely your better choice.

Education

If you or someone close wants to advance their education, tapping into home equity is one way to do it. Like some of our other examples, education expenses are an investment for which you can get a great return. Because some equity loans, especially HELOCs, are so inexpensive, they are good options for paying education expenses.

Place Safe Limits

Regardless of what you want to spend your money on, there is always a financial line you cannot reasonably cross. That’s why if you’re not borrowing money to reduce your debt, you can’t afford to borrow too much.

One factor to be aware of is the loan’s APR. An APR can be sneaky because it’s not quite the same as an interest rate. For example, a $10,000 loan with a 5% APR and a 5-year repayment term will mean a monthly repayment of $188.71, but a total of $1,605.48 in interest payments. But what if the repayment term is just 2 years? It would cost you $443.43 per month and you would pay $642.26 in interest.

To make sure you don’t overburden yourself. Do the math on any loans you are considering taking. Fortunately, there are plenty of online APR calculators that can determine your monthly repayments and the total amount you’ll pay in interest.

What Is A Safe Loan?

Safe is a subjective term. But there’s a reason many lenders will cut you off with a debt-to-income ratio higher than 43%.

If you’re already overburdened with debt, it’s risky to take on more debt. So, ask yourself what you will get out of your equity. Tapping into your equity can help you reduce debt if you approach it safely.