What Is A HELOC And Should You Use It For Investing?

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What Is A HELOC?

I’m sure a lot of you guys are asking yourself what a HELOC is at this point? A HELOC is an acronym used for “home equity line of credit”. A HELOC enables us to utilize the available buying power from the built up equity or in most cases the continually building equity from each mortgage payment we make on our home. The dollar value of the HELOC that is available to you is dependent upon the amount of equity built up within your home. The equity that is built up within your home is used as collateral against your HELOC. Since the equity that is built up within your home is used as security against your HELOC the interest rate that is obtainable on the line of credit is often lower when compared to loans of similar value.

HELOC Requirements

– Getting a home equity line of credit set up was only possible after I purchased a home last summer. Meaning you must own a home to qualify for a home equity line of credit.

– In my situation, available funds or capital to invest only become available from the use of a HELOC once you build up greater than 35% equity of the lower of the appraised or purchased value of our home.

– In my situation the maximum value of the HELOC we were able to get for investment purposes was determined from 65% of the lower of the appraised or purchased value of our home.

The Advantages Of A HELOC

– As mentioned previously one of the advantages of a home equity line of credit is that the interest rates are lower than other line of credits available since the equity in your home is used as collateral against the available line of credit. When used in certain situations a home equity line of credit can provide significant savings in the amount of interest that you would be required to pay if you have consumer debt loan with a higher interest rate.

– The amount of monthly interest owing on the HELOC is completely dependent upon the interest rate of the home equity line of credit and the amount of the line of credit you have borrowed. If $0 were borrowed from your home equity line of credit than the amount of monthly interest that you would be required to pay would be $0. With this being said it can provide a continuously growing emergency fund.

– A home equity line of credit can be used for investment purposes. When this is done correctly it well provide numerous benefits such as converting non-deductible mortgage interest into deductible interest, which results in tax savings benefits.

The Benefits Of Using A HELOC For Investment Purposes

– The interest charged on the home equity line of credit loan when used for investment purposes to produce investment income is tax-deductible. The Canadian Revenue Agency defines investment income as “investments, which produce interest, dividends, or royalties”. The interest that is charged on regular mortgage was converting nondeductible mortgage interest into deductible interest. This decision should result in significant interest savings over the period required to repay the loan.

– If you cash out some of your investment portfolio for a down payment on your house. One of the ways to replenish those investments you recently cashed out is through the use of a HELOC. This is key because otherwise I would have had to gradually rebuild my investment portfolio through smaller monthly contributions when cash became available. As previous posts on The Money Spot have mentioned, one can not ignore the powerful effects of compound interest. Replenishing my investment portfolio in one lump sum compared to smaller contributions will help increase my long term investment returns.

Summary

I have been happy with my decision to use my home equity line of credit for investment purposes. I would like to know if you have a home equity line of credit? Have you used a home equity line of credit before? What was your experience like and any advice you can please share in the comments!

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I have learned a lot over the past seven years on topics involving Financial Independence, Investing, Frugality, and Simple Living. So, if any of these topics interest you, I hope you stick around as I have a lot of stuff to talk about from lessons learned over the past seven years. If you have any questions about a topic or post send me an email at robbiethemoneyspot@hotmail.com

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