A home equity line of credit (HELOC) is an adjustable-interest loan that allows you to withdraw and repay funds as you choose, while the bank charges you interest on the amount of money you use. If you have equity in your home, that is, if your home is worth more than you owe the bank on your mortgage, then you may qualify for a HELOC. Investing the funds from your HELOC may prove lucrative, but since the bank uses your home as collateral to secure the loan, use caution and restraint when choosing investments.
Request a HELOC at the same bank that carries your home mortgage. Your bank may loan up to 80 percent of the equity you have in your home. For example, if your home is worth $250,000 and you owe the bank $150,000, your equity is $100,000. The bank may loan you up to 80 percent of that amount, or $80,000.
Negotiate for the lowest initial interest rate possible when taking out your HELOC. Since this type of loan is a line of credit, it will have an adjustable interest rate. After a couple of years, the interest rate may rise, increasing what you owe the bank. By starting with the lowest possible rate, you will save money.
Research your investments thoroughly. Risky investments, such as playing the stock market, may put your home at risk if the stocks you buy depreciate. Less risky investments might include investing your money in a new business start-up, mutual funds or real estate. Consult a financial adviser if you are unsure.
Make sure you can make the monthly interest payments on your HELOC while you’re waiting for your investment to make money. During the HELOC’s “draw” period, you will only pay interest but after a few years, the bank will ask you to pay off the loan or convert it to a second mortgage.
Since a HELOC puts your home at risk, carefully think through all ventures before you invest.
The interest you pay the bank on your HELOC is tax deductible.
If you can’t pay back your HELOC, the bank may foreclose on your home.