Equity Line of Credit: Ways in which your home is also a financial investment

Equity is the difference between what your home is worth and what you owe on it. For example, if your home is worth $200,000 in today’s market and your mortgage is for $150,000, then you simply subtract your mortgage from your home’s current market value and you discover that you have $50,000 in home equity.

Until you take action to obtain this equity it is somewhat of a theoretical concept. It exists and it is real, but unless you take an action to obtain it then it remains a “paper asset.”

What can you do to get your hands on your equity? Actually you have several choices. You can sell your property. You can refinance your first mortgage. You can take out an equity loan, also called a second mortgage.

There are plusses and minuses to each action. If you sell your home you get all of your equity (minus broker’s commissions and other sales-related fees) but you no longer have a home to live in and must make other arrangements. Refinancing your first mortgage can be an excellent answer if interest rates are lower today than they were when you took out your first loan. If interest rates are higher today then refinancing is usually not a good idea.

Assuming that you have ruled out a first mortgage refinance, then that leaves an equity loan. Equity loans are generally more expensive than a first mortgage, but they are often very easy to qualify for and require less paperwork than most other loans.

When you take out an equity loan you have two choices. You can take your cash all in one lump sum and make payments on the entire amount, or you can take out what is called an equity line of credit.

For many people an equity line of credit works out best. An equity line if credit is similar to a checking account. The amount of your equity is made available to you and you can access this money as you see fit by writing checks for any amount up to the total amount of you equity loan. The benefit is that you only have to make payments on that portion of the equity that you are actually using – and as you pay off your loan that money is added back into your account and is available for you to borrow again.

Unless you have a large, specific project, such as remodeling your house or putting a down payment on another piece of property that requires a large lump-sum of cash, arranging for an equity line of credit may be your least expensive way of accessing the equity in your home. Talk to your tax advisor as in most cases there are tax advantages connected with an equity line of credit.