What is a Home Equity Line of Credit?
A Home Equity Line of Credit or HELOC is a form of open-ended credit that is based off of the equity you have in your home. HELOCs offer low interest rates and high credit limits. This is because they use your home as collateral. As with most Mortgage products, HELOCs are experiencing record low rates right now. Is a HELOC right for you? Let’s take a look!
How does a HELOC work?
HELOCS are different than most mortgage products in that you don’t receive a large sum of money when you complete the loan. Instead, HELOCs are more like a credit card, you pull funds out when they are needed. The amount you qualify for is based off of your current situation. If you do not have a mortgage on your home then you can qualify for 80% of your equity. If you do have a mortgage on your home then you can qualify for 90% of the equity less the amount of your current mortgage balance.
Let’s say that you have a home that is valued at $300,000 and you have completely paid it off, you could qualify for a HELOC worth $240,000 (80% of your home’s value). If you take that same home and still owe $100,000 on it (you have $200,000 in equity) you could qualify for a HELOC worth $170,000 (90% of your home’s value minus the amount you owe).
HELOCs also differ from other mortgage products because they have a variable interest rate, which means the rate can fluctuate over time. The variance in this rate has to do with the prime rate, which is largely determined by the federal funds rate (the overnight rate that banks use to lend to one another). They also have a draw period (period of time in which you can take money out) of 10 years. Payments are still due during the draw period but any remaining balance will roll into a repayment period of 15 years.
What are HELOCs for?
HELOCs can be used for just about anything, but here are some of the more common reasons that we see people taking out a HELOC:
Home Improvement – What better way to pay for improvements to your home than with the equity on your home. Not only will a HELOC give you access to the funds needed for renovations in this case, but it can actually raise the value of your home, building more equity in the process.
Vacations – Vacations are great but they aren’t cheap, so if an unexpected expense pops up prior to a planned vacation, a HELOC is a great option to keep the party going. One thing to keep in mind though is that it can take up to a month for funds to become available to you from the time that you apply for the HELOC.
Medical Bills – Medical expenses can rack up really fast at unexpected times, and HELOCs are typically a better option to pay these off than credit cards due to the lower interest rates associated with HELOCs.
Debt Consolidation – HELOCs are great for debt consolidation because they allow large sums of money to be rolled into the equity of your home which usually leads to a much smaller interest rate on your pre-existing debts.
Is a HELOC loan right for you?
HELOC loans are a great way to get a quick influx of available funds, but it is important to make sure you use these funds responsibly. With your home being used as the collateral, defaulting could mean surrendering your home to the lender. With the stakes so high it is important to discuss your options before diving into a HELOC. Give us a call and talk to Teri Bee, she is as qualified as anyone when it comes to mortgages and she would be more than happy to talk you through your options.