HELOC Home Equity Line of Credit

Although home equity value risk presents a serious threat to a mortgage, it is important to remember that home prices move both ways. So how can we benefit from increases in our home equity without out-right selling the house?

A Home Equity Line of Credit (HELOC) is a product that allows a borrower to take advantage of the fact that they have freed up home equity from their house. This can be accomplished by either paying off the principal of the mortgage (and therefore freeing up equity through payment), or by having the home increase in value over time. For example, if a borrower’s home increases in value by $20,000, or if they pay off $20,000 from the principal of the loan, they will have access to $20,000 in new home equity.

Having done so, the bank will then provide the home-owner with a low-interest line of credit that is secured by the free equity in the home (in this case, a LOC of $20,000). The investor is then free to apply this loan towards investments that will then help to further pay off the remaining equity in the home.

A common practice used by investors to quickly pay off mortgages is to use HELOCs to purchase some extremely safe investment products that will produce an income. They will then apply these new income payments towards their existing interest payments, and therefore effectively hedge their mortgage.

For example, if an investor has $50,000 in HELOC debt invested into a bond that pays 4%/year, and $50,000 remaining in their existing 3% mortgage, they can apply an additional 1% of their investment income every year towards their mortgage.

The end result is that they have effectively reduced their payment interest rate by a full 1%. However, it is important to remember that investments always carry with them an amount of risk. As such, it is always best to only pursue this course after having met with a financial planner or wealth advisor who can safely guide you through this process.

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