Your aspirations of becoming an artist, a small business owner or a start-up maven might quickly sour after you find out how difficult and expensive it can be to obtain funding. What many people don’t consider before dashing their plans, however, is that they might be sitting on a goldmine of an asset — the equity in their own homes.
A home equity line of credit (HELOC) allows you to borrow money against the value of your house. HELOCs are experiencing something of a renaissance, which is a sign that the housing market continues to renew itself. According to data from RealtyTrac, there were nearly 800,000 HELOCs that were originated nationwide through the middle of 2014 — a 20 percent jump from the year prior.
HELOC Success Stories
Taking out a line of credit on your home’s equity (with some financial sensibility and planning) can be a better alternative to tricky personal loans and high-interest credit cards. Check out these inspiring stories of people who used their home equity the smart way to finance their dreams.
An Internet Investment Startup
Mike Scanlin used a $100,000 HELOC to fund a Silicon Valley-based Web startup, which today nets him six figures annually.
Scanlin initially lucked out on the real estate front. While mortgage rates were low, he purchased his home in Mountain View, Calif., with an estimated equity of $500,000. When Google went public and caused local housing prices to skyrocket, Scanlin said his property doubled in value.
Since his line of credit was only about 20 percent of the equity in his house, Scanlin knew that if his business venture failed, he wouldn’t lose his home. “Part of my calculation was: if it fails, I’ve only given up $100,000 in the value of the house,” he said.
BornToSell.com, a covered call-stock market investment strategy site, was launched that same year and began generating revenue in its first month. Scanlin said he used half of the HELOC for living expenses and the other half to outsource programmers and providers to build the website. With a new, successful business in place, he paid off the low-interest loan in three years.
Scanlin advises people to have a savings or alternate job to fall back on if they’re considering HELOCs. “If you don’t have an idea that’s really solid,” he said, “you don’t want to risk your home.”
A Vacation Rental Property
Amanda Stevado and her husband’s HELOC — $60,000 on their home in Canada — helped front 20 percent of the mortgage down payment for a rental house that’s been thriving on the Orlando, Fla., vacation circuit since June of last year. The four-bedroom house, Remy’s Refuge (named after the character from “Ratatouille”), was an idea the couple had been brewing for some time.
“For us, it was less of a gamble than someone flat out buying a business,” said Amanda. “In our minds, the only thing we were going to lose were the closing costs.”
To arrange their line of credit, the Stevados’ bank assessed the value of their residence, which had gone up in value since they purchased it. Eighty percent went into the HELOC.
Remy’s Refuge rents out on a $1,100-per week fee and garners enough revenue to cover the Stevados’ $160,000 mortgage in Florida. It’s become so successful that Amanda and her husband don’t even have first dibs on staying at the vacation house. “When we want to go, we have to book for ourselves or people will steal our week,” she said.
The Stevados’ advice to budding entrepreneurs looking for credit in their home’s equity? “Life is too short. Taking a chance and doing something like this can be really fulfilling,” said Amanda. “It might be scary at the beginning, but it was worth it.”
A Stand-up Comedy Career
Dan Nainan’s successful HELOC undertaking was one big laughing matter: A $196,000 line of credit backed the start of his second profitable career as a professional stand-up comedian.
“My job was to travel the world with the company’s senior executives, doing technical demonstrations on stage at events, and I was incredibly nervous about speaking on stage,” he said. “I took a comedy class to get over the fear, and I was bitten by the bug.”
But juggling a full-time job and comedy became difficult for Nainan. Time constraints meant he could perform only sporadically, and $200 per gig here and there started becoming unfeasible. On the suggestion of a neighbor, Nainan sought a HELOC on the equity he had in his apartment in the Chelsea section of New York City.
“I used the money to help lay the groundwork — not just to pay for expenses but investing in things like social media, video editing, web design and selling tickets to come to shows,” he said. “In the beginning, you have to outlay a lot of money to get a comedy career going.”
Nainan now commands up to $20,000 per show and has performed at two Democratic National Conventions, a TED conference and for dignitaries like President Obama, Michael Bloomberg and Hillary Clinton.
Nainan’s frugal approach allowed him to go into his new venture feeling confident that a portion of his line of credit would go unused. “It was kind of a gamble. I have this much money, and I’m pretty confident I won’t have to eat through all of it,” he said.
A Thrilling Literary Venture
A large retailer loses more than 40 million credit card numbers. This sounds like a headline from the financial news page of GOBankingRates, but it’s actually the premise of a novel titled “Bullseye Breach: Anatomy of an Electronic Break-In,” an IT security thriller by indie author Greg Scott. Scott financed this novel — his first book — with a $65,000 HELOC.
Through a $120,000 remodeling project just after the housing crisis, Scott managed to boost the equity of his Minneapolis home to maximize the value of the HELOC he sought. “We put on a whole second floor and doubled the square footage and space,” he said. “The good news is I did a whole bunch of creative financing and hustling and was able to finance it.”
The home improvements raised the value of his house from $236,000 to $306,000.
Writing, editing and publishing a book requires a lot of money. According to Scott, an IT contractor by trade, it costs $12,000 for a planned run of 2,500 copies. He recommends that people stay cost-conscious even if they’ve been approved for a generous HELOC. “Live within your means as much as you can,” he says. “Pay all your other bills. Keep your credit good, even if you have to be creative to pay all your bills.”
“Bullseye Breach” is due for release this month. “Hopefully readers will come away appreciating Internet security in a way they hadn’t thought about before,” he said.
Things to Remember When Considering a HELOC
These success stories are living proof that your home can be your best ally in financing your passions. But remember to pursue a HELOC wisely. Like a credit card, don’t borrow more than you can afford to pay back. Yet unlike a credit card, your credit history isn’t a major factor in getting approved for a HELOC, according to The Wall Street Journal. Instead, your home is the collateral.
Also remember that HELOCs usually have variable interest rates, according to Investopedia. When interest rates go up, your monthly payments will go up, so make sure you budget your money accordingly.
From GoBankingRates.com: 4 creative uses for a home equity line of credit