3 Ways to Borrow Against Your Assets (part 1 , Home-equity line of credit )

What to know before using your assets as collateral.


Debt often gets a bad rap. But when managed responsibly, it can help you achieve your financial goals. In fact, the more assets you have, the more lending solutions you may have at your disposal.
Clients who have built up their net worth—whether in their homes or investment portfolios—could have broader borrowing options by using their own assets as collateral. But doing so exposes those assets to increased risk, so you've got to have the fortitude and investment knowledge to manage such debt effectively.
Let's take a look at three asset-backed lending solutions—and under what circumstances they might be most appropriate.

1. Home-equity line of credit

What it is: A home equity line of credit (HELOC) is a revolving line of credit, typically with a variable interest rate, collateralized by the equity in your home.
Generally, a HELOC has a 30-year term consisting of a draw period and a repayment period. The first 10 years are the draw period, where you can borrow as much as you need—whenever you need it—up to the limit established by the bank. Typically, during this time, you must make scheduled interest payments but have the option to pay toward the principal. Once the line enters its repayment period, however, you'll owe principal and interest for the remaining 20 years. 
When to use it: Although you can use a HELOC for many purposes, it's particularly well-suited for:

• Home improvements: HELOCs are an attractive financing option if you're thinking about upgrading or you have to make necessary repairs to your property.
• Major purchases or expenses: A HELOC can be a great way to fund a major purchase or cover a large expense. Even if you don't have an immediate cash need, establishing a HELOC can be a great way back up your emergency fund.
• Debt consolidation: Interest rates on HELOCs may be lower than those charged by credit cards and personal loans, which can be helpful if you want to consolidate debt and reduce borrowing costs. However, because a HELOC is secured by your property, you should have a solid payoff strategy before you consolidate higher-interest-rate debt, since you are collateralizing your home.

P.S. Lenders need time to process a HELOC application because it requires a home appraisal and an underwriting review of credit and income, which can take weeks. Because of the time involved, it's best to open a HELOC well before you need the funds.