A HELOC, or Home Equity Line of Credit, is a secured loan that uses your home’s value as collateral, allowing you to borrow against your home equity. People often use a HELOC for home improvements or debt consolidation.
According to Investopedia, “Home equity loans have been around for nearly a century.” However, in the 1980s, the term “second mortgage” was rebranded to avoid its negative connotation, and the HELOC became widely advertised by banks.
Tapping into your home equity can be an easy way to finance home improvements, but there are important considerations. Home equity lines of credit typically have a variable interest rate and may require a minimum amount to be borrowed, often starting at $5,000. This variable rate can be risky, especially if interest rates rise, leading to unpredictable payments and potential shifts in your budget.
An alternative approach, which can be more cost-effective but requires planning, is to set aside a portion of your home’s value each year for maintenance and expenses. For example, saving 1% annually on a $250,000 home would mean setting aside $2,500 per year. If these funds go unused, they can accumulate for larger purchases, such as new gutters or a new roof, minimizing the need for borrowing.
A practical way to save this money, especially for W2 employees, is to automate the process through payroll deduction. For example, if you are paid weekly, you could set aside approximately $48 per week into a dedicated home expenses fund, at year’s end you’ll have close to $2,500. This “set it and forget it” savings approach helps ensure you have the necessary funds for home maintenance without needing to rely on a HELOC.
If you have any questions, please reach out to your Francis Financial Planner at 866-232-6457 or email at info@francisway.com
