There are numerous sources to finance your investments, be it a term loan, your home's new equity, or a Line of Credit. Of course, these options each have their own trade-offs and benefits. However, if you've ever wondered whether HELOC can be an effective source of an upcoming investment, you have come to the right place.

In this article, we will lay down everything you need to know about HELOC. Meanwhile, if you are looking to buy financial products at reasonable rates, check out Mortgage Maestro.

What is a Line of Credit?

Let's consider a Line of credit to be a vast puddle of money, and from this puddle, you can borrow money for your requirements or exigency from a lender whenever you are in need. This pretty much works like the concept of your credit card but with a bit of twist.

You don't have to carry a card to fulfill your requirements. All lines of credit comprise a specific amount of money that can be borrowed when needed and must be paid back when dated.

Every line of credit has a fixed borrowing limit that the user can borrow at any time. This limit is determined by calculating the remaining equity in your home. Most lenders do not lend 100% of this limit. The amounts of HELOC are often limited to 70-80% of your home's remaining equity.

But what makes it different are the benefits associated with it, the main one being that you receive much more ease and transparency than any other formal loan.

Advantages of choosing - Line of Credit

A line of credit comes with numerous benefits that effectively shape your overall investing experience.

Flexible Option

Credit lines are termed one of the best options for taking loans and funds as they ease the overall arrangement and flexibility. In addition, the time duration for repayment that stands with a line of credit is longer than that of any other system that provides a loan.

During repayment, the borrower can adjust their repayment method and repay the entire amount either at once or a minimum amount every month.

Low Interest

The rate of interest charged in a Line of credit is comparatively lesser than any traditional loan form.

As a user, one doesn't have to use all the eligible amounts of HELOC at once. You can opt to borrow only a part of the eligible amount. Hence, you would be required to pay interest only on the amount actually used and not on the entire HELOC limit.

Disadvantages of Line of Credit

There are a few things to keep in mind before choosing Line of Credit as your investment source:
  • Sometimes the flexibility offered by Line of Credit can work against you. If you fail to make the promised payments on time, it will likely add up as interest and result in a sizeable payable amount.
  • When using a line of credit, you must add collateral, which tends to be your own house. And if you don't pay back the amount on the promised date, you could be in a situation of losing your home.

Line Of Credit - An Effective Investment?

Investments can be fruitful and risky at the same time. Of course, the returns can cause a significant impact on your frequency of making repayments. However, experts do not recommend investing by taking out a loan (be it any form of credit). Here are some factors to keep in mind:

Type of Investment

The type of investment you make plays a considerable role in determining whether you should fund it through a Line of Credit. Safer investments can be made in gold or real estate through the HELOC route.

Line of Credit can be a good choice if you wish to set up your own small business. But, again, the flexibility in repayments plays out in your favour in this case.

However, investing in something volatile as stocks should not be undertaken. You run the risk of losing a significant part of your capital. Additionally, you may have to shell out interest on your sunk capital. This can be a significant financial obligation that can possibly end up with you losing your home.

Amount of Investment

If you plan to invest a hefty amount, it would be better to opt for other forms of borrowing, such as term loans. However, HELOCs are perfect if you want to invest a small or medium amount of money. This could include home improvements, a small business, or anything similar.

In fact, home renovations are the most widespread use of HELOC. Most homeowners like to boost the value of their homes by re-investing the home's equity. This can fetch you a better deal if you wish to sell your house in the future.

Expected Returns

Return on investment would be the source through which you'd be paying off the HELOC credit. Thus, you need to factor in the rate of returns on your investment and the risk you assume while earning those returns.

The time that is taken to generate those returns also plays a crucial role. If the gestation period of the investment is long, the interest burden will pile up, and you would have to look for other sources for repayment.

Also, if the investment barely meets your interest payment requirements, then there is hardly anything for you in it. However, the return should be significant enough to leave some income in your hands after paying off the interest on HELOC.

Endnote

A good investment is what we all strive for, but that does not eliminate its risks. And therefore, one needs always to keep their guards up when investing. First, however, one must match the source of funds and mode of investment appropriately.

Avoid making risky investments through borrowed capital. Use your HELOC wisely. If you are not sure about the terms, do not hesitate to take expert advice. A financial decision must not be taken in haste, and a professional's opinion can help you make good decisions.