Separate the equity in your home
Equity in a home (i.e. value of the home minus the mortgage balance) has a zero
percent rate of return. For example, if someone buys a home for $100,000 and
puts $5,000 down, they do not earn any money on the $5,000 put into the house.
Assume the house appreciates at 3% per year. At the end of one year, the
customer has "made" $3,000.
Assuming the same customer put down $20,000 on the same $100,000 home with the
same rate of appreciation. At the end of one year, the customer will still have
made the same $3,000. The buyer earns money on the appreciation of the house
(if any) but not on the equity. This fact may affect how much one puts down on
a home especially if the customer?s money could have been earning interest or
dividends elsewhere.
At the very least, almost everyone should have a home equity line of credit on
their home. Once the line of credit is set up, it cannot be taken away (unless
of course monthly payments are not made). Lines of credit are generally
interest only. For example, assume an individual takes out a $50,000 line of
credit at an interest rate of 8.0%. Like a credit card, one only pays on what
is used. Assume the individual uses $5,000 of the $50,000. The minimum monthly
payment would be $33.33 on the $5,000, which covers the interest. The customer
can pay more if they wish. The amount over the minimum interest payment would
go towards the principal.
Consider the true story of a person who owned a home valued at $350,000. The
individual had dutifully paid her mortgage on time for 13 years. The mortgage
balance was down to $67,000. Unfortunately, through various circumstances the
individual lost her job, had spent down her savings, and had missed many
payments on her bills resulting in a low credit score. Previously she had near
perfect credit. At this dire time she wanted to refinance or set up a line of
credit; whichever vehicle would help her get out of the situation.
Unfortunately, the combination of no income and low credit score precluded her
from securing financing. As long as lenders are owed any money on a mortgage
regardless of the amount, they reserve the right to foreclose for non-payment.
Therein lies the quandary: like insurance, you have to get it when you don?t
need it because when you need it, you can?t get it. The same often holds true
for lines of credit.
By setting up a line of credit, one protects the equity in his or her home in
cases of "hard times".
The closing costs on a line of credit are significantly less than a full
refinance and NO CLOSING COST options are often available.
Some other examples of where lines of credit are useful:
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1) A homeowner wants to make home improvements and wishes to use the equity in
the home to pay for the costs.
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2) The line of credit can serve as a ?rainy day fund? in the event of a job
loss until the customer gets back on his or her feet.
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3) Debt consolidation: Credit cards, car loans, etc. are generally not tax
deductible. Interest on the line of credit (as with a regular mortgage)
generally is tax-deductible (check with your tax professional to be certain).
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4) Pay for college.
We welcome the chance to speak with you further about lines of credit.
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