A HELOC is a home equity line of credit that is secured by the equity in your home. A HELOC allows you to take out portions of the total loan amount (or line of credit) in the form of a draw instead of getting all the funds at one time like a traditional mortgage. There are numerous benefits of getting a HELOC for homeowners with equity in their homes.
How Much Equity Do I Have in my House?
To apply for a HELOC, you must have equity in your home. Equity is the difference between the appraised property value and the total debt you owe on your home (remaining mortgage balances and HELOCs). Equity may rise over time as you pay down your mortgage balance or rise when the appraised property value increases.
Lower interest rates
HELOCs typically come with an adjustable-rate mortgage which can offer lower interest rates than personal loans or credit card debt. Also, rates remain at historically low levels.
Lower closing costs
Only borrow the funds you need
A HELOC is a line of credit that allows you to draw down on the balance as needed during a specific time frame, which can range between 5 and 30 years. Thus, you can control how often you are using the money and how much you are taking each time. Instead of receiving the funds at once, you may have an easier time managing your spending and maintaining a reasonable monthly payment.
The interest paid on your HELOC may be tax-deductible. However, you may only receive a tax benefit if the funds are used for specific purchases. It is best to consult with a mortgage and tax professional to learn more about the associated benefits.
Flexible repayment options
HELOC terms may vary; however, you will typically only pay monthly interest payments during the draw period. Once the draw period ends, you will be responsible for paying back the entire line of credit balance (principal) along with any remaining interest. This provides the borrower with greater financial flexibility and allows you to budget according to your needs.
Ability to boost your credit score
HELOC payments appear on your credit report, so making timely monthly payments may help boost your credit score. This will also help distinguish you as a reliable borrower.
Various ways to use the money
You have the freedom to draw down on the line of credit and spend the funds how you choose. Some homeowners secure a HELOC to help pay for college tuition, make a down payment on a second home or investment property, consolidate high-interest debt, or pay for home renovations.
What if a HELOC Isn’t Right for Me?
If a HELOC is not suitable for you, you may benefit from a home equity loan or a cash-out refinance.
HELOC vs. Home Equity Loan
The main difference between a HELOC and a home equity loan is that a home equity loan is secured by the equity in your home and provides the funds in one lump-sum payment. A HELOC is a line of credit that allows you to control when you receive the funds. Since you receive the home equity loan funds at once, your monthly payments will go towards the principal and interest, rather than just the interest during the HELOC draw period. Home equity loans are suitable for those who may be incurring a significant up-front expense rather than ongoing payments or projects.
HELOC vs. Cash-out Refinance
A HELOC is an additional loan on your property, whereas a cash-out refinance replaces your existing mortgage with a new loan. A cash-out refinance provides you with funds to spend on upcoming expenses and may allow you to change the terms of your mortgage. Since we are in a low-interest-rate environment, you may be able to take cash out of your home and refinance to a lower rate. Additionally, for those looking for stable monthly payments, a cash-out refinance may be right for you as they offer fixed-rate options.
If you or someone you know is interested in learning more about HELOCs or getting started, contact us today!