A HELOC provides a revolving line of credit tied to the equity built in your home and can be used for nearly anything that fits your financial needs – not just
home improvements. To be eligible for a HELOC, you need to owe less than the current appraised value of your property. You also may need to meet a threshold
for the amount of equity you have built to be eligible.
If you want a flexible way to obtain funds at a low interest rate to pay for a home remodel, consolidate higher-interest debt or simply create an emergency safety net for unexpected expenses, a HELOC may be the right choice for you.
What are some HELOC benefits?
Most homeowners choose a
HELOC because
of the flexibility it offers and ease of access to their funds. Unlike borrowing and paying interest on a large lump sum, a HELOC enables you to withdraw only the money you need, and you only pay interest on what you use.
A HELOC typically is a variable-rate product, tied to the Wall Street Journal Prime Rate. When you establish a line of credit, you receive a margin tied to the prime index. For example, you could get assigned an interest rate of prime plus one, which
would be 1% over the prime rate at that time. As the prime rate changes, your rate would adjust accordingly. That’s an advantage over an adjustable rate, which can jump a large amount after a period of time.
A HELOC features a 10-year draw period, during which you can borrow up to your pre-approved amount, and a repayment period.
Other HELOC benefits include low, interest-only payments. You can pay the minimum payment or pay extra. Anything you pay above interest goes toward the principal. In addition, you don’t get charged a prepayment penalty if you choose to pay your
loan off early or close the line of credit. With a fixed-rate HELOC option, you may lock in a portion, or all, of your balance within your draw period - although that’s not an ideal option if rates will likely remain low or drop even further.
Also, you pay low or no closing costs associated with a HELOC.
Does a HELOC have any disadvantages?
Depending on your financial needs, HELOCs could have downsides. If you need all the money at once to buy a car, for instance, a HELOC probably isn’t the right choice. For a large, high-dollar expense, you would want a loan product with a low,
fixed interest rate.
When you obtain a HELOC, you’re adding another monthly payment to your budget — unless you’re using it for debt consolidation. Another factor to consider with a HELOC: Your property becomes collateral for the loan. If you default on
payments, you risk losing your home to foreclosure.
It’s important to thoroughly weigh HELOC pros and cons and talk through your options with a lending advisor before making a decision about which equity product seems right for your situation.
