5 Tips For Tapping Wisely Into Your Home Equity Line of Credit

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5 Tips For Tapping Wisely Into Your Home Equity Line of Credit

Millions of homeowners are using their home equity line of credit to splurge. Should you?

The answer is no.

It’s risky to do so, unless you’re borrowing against your house to make a better investment than the one you have at present, which is your home. So, if your reason for turning to home-equity lending is to pay for your heart’s little desires, such as Super Bowl seats, Caribbean cruises, or a new car, don’t do it. Forget about it. Don’t even consider it.

As a rule of thumb, only consider taking out a home equity line of credit if you’re doing so to make an investment – stocks, for example. Here are 5 tips to help ensure you’re borrowing smartly against your home.

1. Compare Rates.
Remember when you were comparing the mortgages Maple lenders offered so you could choose the best deal? The mortgage Toronto-based lenders quoted depended on your credit score. Well, the same is true for home-equity lenders.

If you have a score of 760 or higher, you shouldn’t have any trouble winning a home equity line of credit that’s half a point lower than the prime rate. On the other hand, if your score ranges from 759 to 700, your rate should be equivalent to the going prime. Finally, if you have poor credit, expect to pay up to 5 points more than the prime rate.

2. Avoid Fees.
So your credit is shot, and the lender is making this an excuse to charge you appraisal and application fees. If you must pay the yearly fee for your credit line plus recording fees, make sure it’s very minimal. Make sure, too, the lender is not tacking fees onto your loan amount. If you’re not careful, you could be paying for the broker fee without knowing it!

3. Know Tax Rules.
It’s said that borrowing against your home is better than other types of debt because the interest is deductible. But, this is not always the case. You will need to itemize to qualify for deductions – something that most taxpayers cannot do because they don’t have the sufficient number of deductions.

Note, too, that if you do manage to get a deduction, whatever tax break you get is limited to the interest on loans amounting to $100,000 or less. So if you borrowed more, whatever interest you pay on the sum over $100,000 is not deductible.

4. Know Precisely What You’re Risking.
Using your home equity line of credit can be a great way to create long-term wealth — but only if you’re not always eating away at this equity. So, before you borrow, make sure whatever it is you’re buying is worth it.

5. Give Yourself some Headroom.
No matter what you need the money for, keep 20 percent of home equity at the very least. If you exceed that amount, you’ll have to pay higher interests. You will also be cutting off an important emergency fund source.

Your home equity line of credit can be a very good cash source for the rainy days ahead. But be smart how you use it. If you’re not, you could lose your home!

Allegro Mortgages Corp.

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