When it comes to your financial stability, planning ahead is essential. A home-equity line of credit can give you an added level of financial security for the future and is best considered while you're in a healthy financial position.
Having an open line of credit on your house can be a valuable tool. It serves as a cash insurance policy, giving you financial flexibility when and should you need it, at nominal costs of securing capital. A HELOC gives you the ability to draw upon the value of your home, but you're never obligated to do so. You can simply pay an annual fee to know that you have access, if needed, without incurring debt. When might a HELOC be of use?
Finance home improvements. The most common and generally intended use of a HELOC is to finance home improvements. In fact, the interest you pay on a home equity loan is typically only tax-deductible if you use the money for home-related purposes. If you're thinking about borrowing to fund home improvements or repairs and anticipate paying off the amount in a short time frame, drawing upon your HELOC might be the best choice.
However, if you're unsure about paying down the balance within a five-year period, you might be better off refinancing your home to secure a lower, fixed interest rate.
Cover emergency expenses or consolidate debt. Ideally, you have an emergency fund available to cover large, unanticipated expenses. If not, and particularly if you have other debts, your HELOC could be an appropriate way to access capital. The interest might not be deductible if the loan exceeds $100,000 ($50,000 if you're married, filing separately), but it's typically at lower rates than other debt vehicles. Paying interest might also be cheaper than incurring capital gains by selling investments, especially if the funds are only needed for a short period of time.
If you're thinking of moving. A home equity loan can offer the liquidity you might need for a down payment on a new house or to cover the basic expenses related to buying and selling your property. However, it's important to note that you typically can't get a home equity loan once your house is listed for sale, so be sure to apply and draw against your HELOC before staking the For Sale sign in your front yard.
If you lose your job. One important reason to consider obtaining a HELOC is to provide for you and your family in the event you lose your job. It can pay to have a line of credit available in advance, just in case. People often scramble to obtain a HELOC when they lose their job, but unfortunately it's typically too late, as you must have secure income to qualify.
Should you need to move out of your home. Another qualifying factor to obtaining a HELOC is that you're currently residing in your home. If you suddenly encounter a family or housing crisis and are no longer able to live there, obtaining a loan could become problematic, during what's already a challenging time. Again, planning ahead can ensure you have the security of a home-equity line of credit available should you need it.
Bulk of savings in retirement accounts. Most Americans hold the bulk of their savings in retirement accounts, such as individual retirement accounts and 401(k) plans. Withdrawals from such accounts are subject to ordinary income taxes, plus possible penalties if you're under age 59½.
A look at nine reasons why a Roth individual retirement account is a fantastic investment vehicle for most savers.
Retirement depends on interconnected disciplines. Some have to do with behavior, and others concern prudent planning.
Helping family members financially is noble, but loaning money can sabotage personal finances and emotional well-being.
A home-equity line of credit adds another level of security and is best considered when in a healthy financial position.
More From Investor Toolkit
Putting together a set-it-and-forget-it portfolio has served advisor Christina Empedocles well over the last 20 years.
Being a millionaire can seem like an elite club. Others believe it's a magic number to reach to retire comfortably.
Traditional IRA or 401(k) and 529 plans can be smart accounts to invest, thanks to their unique tax-free qualities.
The Small Business Survey provides insight to Main Street opinions on regulation and hot issues facing smaller firms.
The latest news from the Squawk Box team on investing and business.
Business icons and provocateurs share their innovative models. Learn how to upend old industries and start new ones that move markets.
Jim Cramer recalls when he used to drive himself crazy about erratic trading in August.
Jim Cramer breaks down Macy's business to discover that the struggling retailer's stock could still be a buy.
As China's financial markets mature, major foreign financial firms increasingly want to tap the multitrillion-dollar institutional investor market there.