Homeownership in of itself is a wonderful personal and financial achievement for many. Not only is there a sense of pride in owning your home, but you usually will have made a great investment for you and your family. But did you know you can also put that investment to work to achieve your other financial goals via a Home Equity Line of Credit, also known as a HELOC?
If you’re a homeowner and have never heard of a HELOC before or have been unsure of how to utilize one, here’s all that your need to know about this flexible and popular line of credit option.
What is a HELOC?
A Home Equity Line of Credit (HELOC) allows you to borrow at low interest rates using the equity in your home as collateral. Home Equity Line of Credit are an attractive option for borrowers because the funds can be used for just about anything – home improvement, debt consolidation, boat purchases and more. Many people also use a HELOC to pay for college tuition, weddings, medical bills or any other unexpected expenses.
How does a HELOC work?
A HELOC works similarly to a credit card, where you would borrow against your spending limit as needed, but instead of a credit line, you’re borrowing against the equity in your home. Then, you pay back this borrowed amount along with interest. Banks often limit the amount you can borrow to no more than 80% of the appraised value of your home, minus what you currently owe on your mortgage.
HELOCs are often touted a flexible option where borrowers can withdraw and make payment on a daily or weekly basis. Once approved for a HELOC, your bank may allow you to withdraw money during a fixed time known as a draw period. Afterward you’ll either have your line of credit renewed or you will need to pay the outstanding amount during what’s called the repayment period. The length of a HELOC can vary, but they can be up to 30 years, with a built-in draw and repayment period. In the case of a 30 year HELOC, for example, typically the draw period is 10 years with a repayment period of 20 years.
Who qualifies for a HELOC?
First and foremost, borrowers must own a home to qualify for a HELOC. Other requirements for a HELOC will vary by lender or bank, but it will largely depend on your debt-to-income ratio, your credit score and the current value of your home.
HELOC Pros vs. Cons
Many homeowners opt for a HELOC over other lines of credit for several reasons, but what makes it unique is that borrowers can withdraw funds as needed instead of taking out a lump sum. This especially useful for when dealing with financial emergencies or unexpected costs, like losing a job or needing to replace your roof. Best of all, interest rates tend to be lower than other forms of consumer credit. Banks also often have special deals or promotions for HELOCs, such a Flex HELOC where borrowers can lock in a fixed rate for 5, 10 or 15 years or more.
However, because a HELOC is tied to your home, you risk losing it if you’re unable to repay on schedule. Not to mention, opening a HELOC comes with some additional costs, like a property appraisal, application fees and closing costs. Finally, like any line of credit, a HELOC requires discipline and responsibility to withdraw and pay the funds your borrowed on time without risk of losing your home.
I’ve been approved for a HELOC. Now what?
If you decide that a HELOC is the right choice for you, there are still several things to keep in mind to ensure you use it and pay back the funds responsibly. First, withdraw funds purposefully. While you can use a HELOC for just about anything, you still want to be smart about it. For example, while many use a HELOC for home improvement projects, think about what would really add value to your home such as kitchen/bathroom remodels or an addition, and set a budget for yourself so you can be successful in paying back the funds.
Once you’re approved for a HELOC, don’t forget to ask your bank about the safest ways to access your HELOC to avoid risk of fraud. Ask if your bank can electronically transfer funds from your HELOC into your checking account or via a credit card linked to the account. These options offer you greater protection over writing a check. Like your other accounts, don’t forget to regularly check statements to make sure everything looks accurate month-to-month.
Like any line of credit, a HELOC can be a great tool in helping you move forward in your financial journey, but it comes with a certain level of responsibility. When used right, a HELOC can be there for you and your family to no matter your financial goals.
If you have a life event or large purchase in your future, opening a home equity line of credit could be a good fit for you. Not sure where to start? Contact our team for advice today.