Home Equity Lines of Credit (HELOC) are sometimes referred to as ‘second mortgages,’ but this isn’t necessarily true. These loans act much the same as a credit card. HELOCs are lines of credit with a dollar limit (determined by your homes worth and how much of it you own) which you can draw from whenever you want, and for any amount you want (there are some limitations, but let’s keep it general for now). Usually these loans are used for home improvements or other costly maintenance, but there really are no rules on how to use the money, as long as you make your monthly payments. Let’s take a look at some reasons for taking out and using a HELOC.

Don’t Move, Improve!
Several homeowners are turning to large renovations on their existing homes rather than moving to a new one. With the market in the state it’s in, selling your home is no longer a smart option. If you purchased your home in recent years, it’s very likely that if you sold it today you would be losing money. Therefore people are using the equity in their homes to renovate and make them better. Between additions, upgrades, and remodels, people are essentially building a new home from their old one, instead of dealing with the hassle of buying and selling. There’s another reason people are putting down the ‘for sale’ sign and picking up a hammer; renovations build value. The more updated and expanded your home is, the more its value increases. So a few years down the road when you do sell, you’ll make more in profit than you spent on renovation.

Money For The Lean Months
If you’re a seasonal worker or are self employed, a HELOC may be the way to make sure you don’t starve during your off months. Perhaps you have a landscaping business that is very productive and employs many people. But every year when the snowy season comes, plowing roads just doesn’t pay the bills. Not to mention you don’t want to lose all your employees because you can’t pay them as much as they earned during the summer. If you use money from a home equity loan to bolster your accounts during those times, and pay it back during your busy months, you can even out your expenses and maintain a steady flow of cash all year.

Make Credit Cards Go Away
High interest credit cards can be the thorn in your side that just won’t go away. With a HELOC, you can pay off your credit card and essentially ‘transfer’ the balance to your new loan. The interest on home equity loans is significantly less than many credit cards. Average rates for high interest cards can be anywhere from 20% to 30%, while HELOCs are currently between 4% and 6%. A scenario (warning, math ahead!):

Say you have a $15,000 balance on a 20% credit card, and planned on paying it off in 5 years. If you paid off that card with a 5% home equity loan, and paid it down within the same 5 years, you’d save $6,860.40 in interest! Not to mention going from a monthly payment of $397.41 to a much more manageable $283.07. Sounds good to me!

Let’s face it, our money is not looking good right now. Whispers of recession and reports of a weak dollar translate into higher gas prices and lower home sales. Investing in the stock market is a scary and dangerous endeavor, particularly for people who aren’t very wealthy. Some of us may have scoffed at our grandparents, how they scrimped and saved and hid their money under mattresses to achieve their financial goals. Now many of us are starting to see the wisdom of a piggy bank on the dresser. The problem, of course, is that we aren’t a country of savers, we’re a country of instant gratifiers. We want the latest greatest of the biggest best, and damn the consequences. It’s the American Way.

Now we’re reaping what we’ve sown. Debt is one of the major crises facing this nation, and irresponsible or ignorant spending is to blame. How do we counteract this cancer of the economy? By holding off on that triplegrandemochafrappewhatever, and stowing away a few bucks for rainy days. But just putting spare change in a jar isn’t good enough these days. We’re far behind in the savings race, and we need every edge we can to catch up and build our wealth. How do we do it? Smart financial decisions, and the first smart decision is a savings account.

Possibly the simplest, and most overlooked method of building wealth is using the banking system to your advantage. Savings accounts have been around forever, and are still a solid way of putting some money aside. Here are some tips to make the most of your account:

• Save where you bank – It is a good idea to set up a savings account at the bank where you have your main checking account. Often banks will offer better rates or more attractive benefits to customers who have all their accounts with them. They aren’t as likely to do that for a customer who bounces around from bank to bank looking for the best deals.
• Don’t link your accounts – A savings account that links to your debit card is just asking to be tapped…don’t do it! You are your own worst enemy.
• Set up automatic transfers – When you receive your paycheck and deposit it in your checking account, have the bank automatically draft your checking for a certain amount and have it deposited into your savings. Personally, my direct deposit goes into my checking every other week. I set up a transfer to occur at the same time for $50. Essentially, I’m automatically saving money without even thinking about it.
• Go Online – Believe it or not, the best savings accounts are online. HSBC, ING Direct, and EmigrantDirect are all good examples that have extremely high interest rates. There are two catches however; you have to have an existing checking account at a physical, brick and mortar bank, and the interest rate is usually variable. As far as security goes they are usually very tight, so expect to have a lot of passwords. Here’s how it works: you sign up for an account online and enter your information. Then in order to fund the account, you have to provide your checking account information and sign/receive authorization via postal mail. The funds are then wired from your account (no fees) and deposited into the online account. And the best part? They’re FDIC insured, just like your local bank.