How does a EQUITY LINE OF CREDIT work?

excellent vehicle to borrow money. your house is collateral.  you use
only as much of the credit as you need.  i think interest on the first
100 k is tax deductible, then any additional amounts used for home
improvement also have tax deductible interest. good now, as long as
the interest rates stay low, not sure if possible to lock in an
interest rate to avoid future interest rate escalation , as i believe
rates will probably be going up  in the future.

eloans.com is a good place to start a bidding war on your own behalf.
i am not a financial expert, just have an equity line.

Hi Rudi,

With a line of credit (LOC) you become your own bank. Depending on
your attitude to money this can be perfect for an investor, or a
danger zone for a spendthrift.

In Australia a LOC is based on 80% value of property. That is, you
need 20% bank valuation unencumbered before you have access to the
unencumbered balance. I hope that your banking laws allow for same. It
is also picking up in the UK.

Example 1: $500K property with $100K deposit sits you at exactly 20%
equity, provided that other costs such as Stamp Duty etc. are met. You
are at your limit.

However, the magic starts to appear once you reduce your debt below the 80%.
The difference is yours to use as you wish. A LOC requires only one
interest payment per year, not neccesarily monthly. This can free up
investment funds for you during the year, to multiply your investment
input.

You can forget about a savings or cheque account separate to your
housing loan. You won't want or need one. What you will have is an
off-set account for day-to-day living. This will be paid for by a
credit card with 55 days interest free, attached to the off-set
account. This means that instead of earning interest on savings, the
interest earned on your off-set "cash" account will be offset against
your mortgage. Hence the name of the account.

Example 2: Your standard Mortgage account may charge you say 6.5%.
Your standard Savings account earns you say 3.5%. The dollar value of
your off-set account is deducted directly from your Mortgage account.
This saves you the difference of 3%. No point in earning 3.5% when it
costs you 6.5% at the other end.

Also, consider having an account at your petrol station, supermarket,
whatever, to push out the payment up to the 55 day interest free
period.

Example 3: debt is say $500K. Income earned and deposited today is
$3k. Your debt has reduced to $497K immediately, with interest payable
on $497K .. not $500K. You then spend $2.5K (55 days interest
free)before your next income cheque of $3K. Now you owe $499,500.

Provided that your debt is ever reducing, this is the way to go. It
frees up equity in an existing property for further investment, be it
shares or real property.

Apart from that, talk to your accountant.

All the best, Phil

Rudi,

One very important point to consider.

99% of the time, stay with market interest rates. If you lock in at a
fixed rate, there will be a cost to bear. I was fortunate to lock in
at 13% before the hike to 18%. I was lucky. However, over a 30 year
period I have seen that market values outweigh fixed rates. Fixed
rates are generally about 2% above variable rates. That's for a
reason. Don't ever think that you can out bluff the banks.

Phil