A Home Equity Line of Credit

Posted by: Henry B. | Jan 10,2008


There’s been some talk here about a home equity line of credit  Sophie @ Retirement mentions how borrowing on equity can be a good source for investment leveraging (borrowing money to invest).  She doesn’t suggest this is the only way to use a home equity line of credit, but it’s the easiest way for a home owner with decent equity to get some quick investment money.  

By far, the best way to use a home equity line of credit is to put that money directly back into the home via home improvement.  With home prices and values falling, home improvement can stem the tide of dropping value.  Though you’re borrowing on equity – in effect making your equity less valuable because there’s less of it – this will be balanced out by the increase in value of the home via a home improvement project.  That’s a sort of a confusion calculation, but just think of it in terms of home improvement = increased value.  By the time you pay off the home equity loan, the value of your equity will have gone up considerably.  

A common scenario is when a homeowner adds a pool to the backyard.  Obviously this can make a home more valuable.  The home equity line of credit basically acts the same as a credit card.  It’s not a loan in the same way a second mortgage is a flat-figure loan.  Instead, it’s like a credit card with a credit limit where you can withdraw as much as you need.  Certainly, you could withdraw the limit all at once, but it is more common for people to withdraw piecemeal, rather than get in to deep all at once.  

If you’re already deep in debt due to other sources, you’re in a worse situation to take on another type of debt.  It can still be worthwhile if you are able to pay off both the line of credit and any other types of outstanding debts without defaulting.  Borrowing too much off equity can hurt your credit rating.  However, if you use the line of credit for both home improvement and to pay off existing credit card bills, shrinking the balance on other types of debt could offset the dip in a credit rating from maxing out a line of credit.  

Basically it comes down to this: if you’ve spent years paying off your mortgage, a line of credit is like a reward for all that hard work.  If you use the money wisely, you can potentially increase your savings via an increased home value, new investments, and decreased debt.  

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