Quell Financial Insecurity with Home Equity

Have you been feeling nervous about your financial situation lately? If so, you’re not alone. According to a recent report from the Rockefeller Foundation and Prof. Jacob Hacker of Yale University, economic insecurity in this country is at its highest point in 25 years.

The study says that people become “economically insecure” when two events occur in a year’s time. First, they experience a 25 percent or more drop in income, which can occur from the loss of a job, and/or a major medical expense that’s not covered by insurance. Second, they discover that they don’t have enough money in their savings accounts to cover their expenses. Currently, with high unemployment, a drop in real estate values, and a wishy-washy stock market, it’s likely that you or someone in your life is among the economically insecure. But if you have accumulated equity in your home, you may be able to tap into it to create a safety net so you won’t feel like your world is falling apart if your financial fortunes take a turn for the worse.

Build a safety net with home equity

A home equity line of credit, also known as a HELOC, is one possible way to make sure you have funds to tap into if you run into money troubles. In order to apply for one, you must have accumulated equity in your home. To discover how much credit you’ll qualify for, figure out the amount that your home is currently worth on the market, then deduct the amount due on your mortgage. Most banks will allow you to take out a HELOC of up to 80 percent of that amount.

A HELOC works a lot like a credit card. The bank grants you a line of credit, and you can withdraw against it on an as-needed basis. You pay interest only on the amount you borrow. Most HELOCs offer an interest only period during the first 10 to 15 years of the loan, so you can pay the principal back at a rate that’s comfortable for you. But be careful…you must be disciplined if you use a HELOC, or you may find yourself having more debt that you can handle.

Applying for a HELOC

In addition to having accumulated equity in your home, the bank will be looking for other signs of financial stability, including a low debt-to-income ratio, a history of steady employment, and a high credit score.  That’s why it’s best to apply for one before you’re in financial distress, as a means to protect yourself from that situation ever becoming a reality. The application fees are very low and, in many cases, the bank will waive them completely.

Financial stability is essential if you want to feel secure in your life. If your income has dropped and you’re struggling to make ends meet, it’s not possible to build up your savings account. But if you have equity in your home, you can tap into it to build a safety net. And that security is priceless.