There's an old saying in personal finance: cash is king. Anyone who's ever made an offer to buy a home knows how incentivizing it can be to make an offer in cash, for example. And while owning a home can be a great thing, there is often one problem with home equity: it can be difficult to tap into. For many homeowners over the past several years, rises in home equity have only been "on paper," pushing up property taxes but not necessarily offering a personal benefit.
But home equity can be a powerful tool when you need access to cash, especially if you know how to use home equity to open access to cash quickly. One way of doing that is a HELOC from a company that offers speed and ease when offering you a Home Equity Line of Credit. Here's what you'll need to know about how it works.
Homes are now more liquid than ever
For many homeowners, home equity can be one of the most substantial sources of their personal savings. By paying towards a mortgage every month, consumers are utilizing a sort of "forced savings." The equity they own in their home builds, but unlike a traditional savings account, it's not easy to go and withdraw the money they need.
Thanks to this underlying equity and the fact that it's a secured loan, a HELOC can often be less expensive than other loans. You end up with cash delivered quickly to your account. And if you pay off the HELOC successfully, you’ll regain your home’s equity. You still remain the owner.
What is home equity? It's the difference between what you owe on your home and the your home’s current value. For example, let's imagine a home valued at $350,000. You purchased it with a mortgage, but you still have $100,000 left to pay on the loan.
Your home equity would be the difference: $200,000, giving you plenty of value upon which to take out a HELOC.
How to access cash from your home's value
The idea of using a home to access fast cash can be counter-intuitive at first. Having a home isn't an entirely "liquid" form of investment. In investing, liquidity is defined as the speed and convenience with which you can turn an asset into another form of value.
For example, a share of public stock is highly liquid because you can often sell it within a day, an hour, or even minutes.
Owning a home requires more than just a click of the mouse, however, which can present some challenges to liquidity. However, using a HELOC adds more liquidity to the value of your equity. By turning that home equity into a ready supply of fast cash for when you need it—say to pay off consumer debts or sudden medical debts—you make your home "more liquid."
HELOC vs cash-out refinancing
But even better, a HELOC can give you access to fast cash without requiring that you change the underlying loan. That can be a powerful benefit for anyone who took out a mortgage in recent years.
Mortgages have been at historically low rates. Using a loan like a cash-out refinance can give you cash for the home equity, true, but it also means adjusting rates to the higher contemporary rates, which can cost you money in the long run.
A HELOC doesn't have this requirement; you simply borrow what you need against existing equity, instead of refinancing the entire balance owed on your home.
HELOC vs credit card
You might think of a HELOC as turning your home equity into money, the way you can keep a credit card on standby to make a purchase whenever you want, up to a certain limit.
But there are key differences here that you'll want to be aware of:1
HELOCs have lower interest rates. Because credit cards are unsecured debt, they charge higher interest rates. HELOCs use your home to secure the debt, however, lowering the risk of the lender. This means the lender can charge lower interest rates for the money they're sending you. This, in turn, typically gives you a cheaper form of debt. Some people even use their HELOC to pay off credit cards.
Interest deductions. Consult with a tax professional, but when using a HELOC, the interest you pay has the potential to be tax-deductible if the money from the HELOC goes towards the value of your home.
Higher limits. A credit card in your pocket typically won't have a very high limit unless you have a specific history of a high income and paying off credit card debts. But with a HELOC, using home to secure the loan can also offer the benefit of putting higher limits on the amount you can borrow. This gives you more flexibility to use the cash toward major projects such as renovations. It's also one reason consumers turn to HELOCs for debt consolidation—it's possible to use this larger limit to pay off several smaller loans.
Flexibility. A credit card is fairly straightforward: you borrow money and you have until the end of your billing period to pay it off before incurring interest. With a HELOC, you have an end date on the repayment terms too, but it's typically repaid over a longer period. And the HELOC typically extends its credit to you with flexible terms, meaning that as you repay a portion of the loan , it's easy to draw on the account and re-borrower it.
HELOC vs savings
Why not tap savings if you need to undertake a project like a home renovation? It's possible for many people. But there are some drawbacks as well. For starters, you don't have a time machine—and savings only accrue over a period of time.
It's true that savings have the advantage of not requiring that you pay any interest. But spending your savings all at once can leave you without a financial cushion for other aspects of your life. For example, if you lose a job or encounter a sudden medical bill, you can find yourself with a lot of money to pay off in a hurry. If you depleted your savings because you didn't want to tap the equity in your home, you're left with no option but to turn to debt.
What can you use a HELOC for?
You can use a HELOC for your home, but it doesn't have to be strictly for home renovations. It's more flexible than that. Here are some of the things you can use a HELOC for:
Paying for college
Starting a business
Paying off consumer debt
How a HELOC from Figure works
Consider a HELOC with Figure if you want to turn your home equity into cash. It's a straightforward application process, and the speed at which you can access money from the equity in your home may surprise you.
1 A HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay.