If you’re a homeowner looking to finance a home-remodeling project, consolidate credit card debt, and/or pay for big-ticket purchases, you may want to weigh the benefits offered by a Home Equity Line of Credit, or HELOC. In this article we’ll explore HELOCs and how to determine if they are right for you.
What Is a HELOC?
HELOC is an acronym for a home equity line of credit. It's a line of credit consolidated by the equity in your home, which gives you access to a line of credit that you can use for significant expenses. The interest rates for HELOC loans are considerably less when compared to other loans.
HELOC often has a draw period of ten years, and at this time, you can borrow any amount you want. After the draw period ends, the repayment period, which is generally up to 20 years, begins. Your house is the collateral for the loan.
So instead of paying out in full at closing like an average mortgage, a HELOC is a lender’s promise that the lender will advance the borrower's loan for a set amount of time of the borrower's choosing. The market value of your property decides how much you can take out in HELOC.
For instance, if your property value is $500,000 and you’ve paid up to $300,000 in mortgages, you may qualify for $40,000 to $140,000 dollars in HELOC. It all depends on your credit score. An excellent credit score increases your eligibility.
Factors to Consider When Determining If a HELOC Is Right for You
While a HELOC offers a flexible way to unlock funds from the equity in your home, it’s important to do your homework to determine if it is the right choice for your financial circumstances. When considering a HELOC, and shopping for a lender, understand features including:
Draw periods: During this term, also known as the borrowing period, you may spend, or “draw” funds from a HELOC to pay for expenses as you see fit. This period may range from five to 10 years, based on the lender. Once it concludes, you may no longer spend funds from the HELOC.
Repayment periods: At the conclusion of the draw period, the repayment period—or period where you pay back both the funds you used and accumulated interest—begins.
Interest rates: Interest rates for a HELOC vary among lenders but are generally lower than you would pay on a credit card. Many lenders offer either a fixed interest rate (which remains the same throughout the loan) or a variable interest rate (fluctuates based on changes initiated by the Federal Reserve).
Credit line amounts: This total loan amount is determined based on the equity in your home as well as your current financial health according to your credit score, income, debts, assets and other factors. Most lenders limit maximum HELOC lines of credit to around 80 percent of your home equity.
Applying for a HELOC
The process of applying for a HELOC is similar to what you likely experienced when applying for your home mortgage. Initially, you will complete and submit an application online. Then, for verification purposes, you may also need to provide documents including:
You’ll also need to factor in a range of closing costs for your HELOC such as appraisal fees, attorney fees, origination fees, and application fees.
Overall, HELOCs can offer homeowners a flexible option to help pay for big-ticket items or consolidate high-interest debt. Be sure to understand the features, as well as any associated costs and fees, before finding the one right for you.