HELOCs: What You Need to Know

posted September 26, 2017 in Blog

With a rising rates environment, borrowing against the equity of your home may likely be a better choice than moving to a new home. You may choose to fund home renovations and other high-priced needs using your equity with a HELOC.  

What’s a HELOC, though?

A Home Equity Line of Credit (HELOC) is a revolving credit line that allows you to borrow money as needed to a limit, with your home serving as collateral for the loan. The amount you will qualify for is calculated based on your home’s loan-to-value ratio, payment term, your income and your credit history. Most home equity loans have a fixed interest rate, a fixed term and a fixed monthly payment. You won’t be advanced the money: you spend it as you need it, but you can only borrow up to a certain amount. As you pay the line of credit off, the amount of available money is replenished, just like a credit card. One aspect that separates the two is the much lower interest rate available for a HELOC. Though the rate is not fixed and may go up or down, it will still typically be far lower than the interest rate on a credit card. You pay whatever rate is in place at the time of your bill, not at the time of your purchase.

Pros

HELOCs allow for more freedom than fixed home equity loans. Since you’re opening a line of credit and not borrowing a set amount, you can withdraw money as needed from the HELOC over the course of a set amount of time known as the “draw period.” This is especially beneficial if you’re renovating your home or using the money to start a new business and don’t know exactly how much money you’ll need to fund your venture.

Repayment options on HELOCs vary, but are usually very flexible. When the draw period ends, some lenders will allow you to renew the credit line and continue withdrawing money. Other lenders will require borrowers to pay back the entire loan amount at the end of the draw period. Others allow you to make payments over another time period known as the “repayment period.”

Monthly payments also vary. Some require a monthly payment of both principal and interest, while others only require an interest payment each month with the entire loan amount due at the end of the draw period. This can be beneficial when borrowing for an investment or business, as you may not have the funds for repayment on a monthly basis but anticipate earning enough to pay back the entire loan.

There are no closing costs, and if you don’t spend it, you don’t pay it. There is no monthly fee. When your balance is zero, you pay zero.

Cons

Receiving all the funds in one shot can be problematic if you find that you need more than the amount you borrowed. Also, the set amount is due every month, regardless of your financial standing at the time. And, of course, if you default on the loan, you may lose your house.

While a HELOC is great, using that money to repay other debts is dangerous because it just racks up more debt. That’s why most of the time, a HELOC is used on a home improvement project to raise the value of your home. Staying on top of payments and making sure you only spend what you can afford to repay is critical.

How do I get one?

If you owe less on your house than it’s worth, you could be eligible for a HELOC. There are a variety of things that are taken into consideration, like your credit score and current job, but having equity in your home is a must. Swing by your nearest Greater Iowa Credit Union location to talk about your brand-new bathroom plans or that dream outdoor oasis, and see how quickly you can get started on those renovations.