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If you are a homeowner, you likely have the ability to utilize a home equity line of credit (HELOC). A home equity line of credit (HELOC) is a very useful resource that can be used to help homeowners get more credit to use for a second home, home improvement/renovations, and more.
However, HELOCs can be complicated, and there are many different factors and considerations that homeowners must keep in mind when looking at a home equity line of credit (HELOC). This blog will cover the basics of a home equity line of credit (HELOC) is, what they can be used for, and more.
What Is A Home Equity Line Of Credit (HELOC)
So what is a home equity line of credit (HELOC)? Put simply, it is a line of credit that uses the equity you have in your home as collateral. Because lenders have an asset (your home) to fall back on, a home equity line of credit (HELOC) tends to have higher credit limits and lower rates.
This is a big part of why they can be a great resource for homeowners. You can get a line of credit with a higher limit and lower rates than most other options, saving you money in the long run.
Home Equity
Home equity is the basis of a home equity line of credit (HELOC). The amount of credit you have access to depends on how much equity you have in your home. To figure that out, you take the estimated value of your home and subtract the total value of any mortgages, HELOCs, home equity loans, etc.
Typically, homeowners can take out a home equity line of credit (HELOC) for around 85% of the equity they have in their home. However, that amount will vary depending on other factors like your credit score. Your interest rates will also vary depending on similar factors to your credit limit.
There are also less fees associated with a home equity line of credit (HELOC). They usually have low or even no origination fees. This makes them a great option compared to many other options available.
HELOCs have a draw period which is followed by a repayment period. The draw period involves lower interest-only payments, and the repayment period includes substantial higher payments. Homeowners must be ready for the repayment period, or else they run the risk of missing payments and losing their home.
Line Of Credit (LOC)
A line of credit (LOC) is an important part of a home equity line of credit (HELOC). A line of credit (LOC) is a loan from a financial institution that is flexible, allowing you to spend it as needed and repay immediately or over time. Interest is charged as soon as the money is borrowed, and they are typically used for projects where the cost can’t be accurately estimated.
HELOC
A home equity line of credit (HELOC) is a great option for homeowners for many different reasons. As mentioned above, they can help homeowners get a line of credit that is higher and has lower interest rates than other options. This can help them get a second home or renovate their first home at lower costs.
However, there are potential downsides. Using your home as collateral means you risk the possibility of losing the home. While this is of no concern if you can consistently make your payments, it is still a potential risk inherent to a home equity line of credit (HELOC).
Another potential risk is debt reloading. Homeowners can get caught in a cycle of debt if they abuse the home equity line of credit (HELOC) system. Many people spend freely during the draw period, are unprepared for the repayment period, and then take out another home equity line of credit (HELOC) to pay for the first one. However, if/when home prices drop, these homeowners often lose their homes.
That said, a home equity line of credit (HELOC) can still be a great resource for homeowners when used responsibly.