What You Need to Know About HELOCs

If you’ve built up equity in your home and need some funds over a long period of time, then a home equity line of purchase (HELOC) could be a good option. HELOCs can be used for a variety of purposes, including remodeling your home, paying major medical expenses, consolidating debt, and covering college tuition. A HELOC is a revolving line of credit that functions similarly to a credit card and uses your home equity as collateral. You can borrow as much as you need up to your limit, and then pay for what you borrow with added interest.

How Do HELOCs Differ from Home Equity Loans?

A home equity loan is a lump sum agreement that is good for a 1 time purchase. You get a set amount of cash up front and then pay it back in stable monthly payments. With a home equity loan it is likely that you will have a fixed interest rate, so you are protected if rates rise. On the other hand, a HELOC is better for people who need funding over a long period of time (ex: paying for college tuition at the start of every semester for 4 years) because it is more flexible and does not involve a lump sum. You can take out the funds you need when you need them (up to a point). They usually involve variable interest rates that are based on public indexes (such as the prime rate). Therefore, if rates rise you could end up paying more in interest.

How Does a HELOC work?

A HELOC usually consists of two parts: the draw period and repayment period. The draw period is a set amount of time in which you have access to the funds. During the draw period you will still have monthly payments, but usually just for the interest. When the draw period ends, the repayment period begins and you pay back what you owe plus interest. A typical HELOC might consist of a 10 year draw period followed by a 20 year repayment period.

What are the Pros and Cons of a HELOC?

Pros:

A HELOC provides flexibility allowing you to borrow and pay back funds as you please. Additionally, HELOCs usually offer lower interest rates than credit cards and the interest may be tax deductible. If you’re looking to make large purchases over a period of time and want to pay less in interest, taking out a HELOC could be beneficial.

Cons:

Since you are borrowing against your home equity, if you cannot pay back what you borrowed then you could lose your home. Also, there are many fees involved with getting a HELOC. You will have to pay for a home appraisal, closing costs, and might have an application fee.

How Do I Qualify for a HELOC?

To qualify for a HELOC, you must have equity in your home. With a HELOC, you can usually borrow up to 85% of the market value of your home minus the amount you still owe on your mortgage. For example:

• The appraised value of your home is $100,000
• 85% of $100,000 is $85,000
• Say you still owe $50,000 on your mortgage
• $85,000 – $50,000 = $35,000

Therefore, the maximum amount you could take out on a HELOC loan is 35,000. However, your credit score, income, debts, employment history, and financial obligations will also play a factor in determining the maximum amount you can borrow. This information will also impact your interest rate. Most lenders use a prime rate and add a markup that depends on your history. If you have good credit history, you will likely receive a better rate from lenders and will be able to borrow more money. If you’re interested in taking out a HELOC, Total Mortgage Services’ HELOC program offers all the finances, support, and information you need. Contact us today at 844-671-9947.