Home Equity Line of Credit (HELOC): What It Is, How It Works

Whether you’re coping with sweltering heat and an old, barely functioning air conditioner or you want to upgrade your kitchen, you are facing a significant expense. According to Home Advisor, most people spend just over $20,000 on a kitchen remodel; that air conditioner could cost you up to $9,000 or more as well, depending on the size of your home.  

While you might be able to secure a personal loan, a home equity loan or put these expenses on a credit card, you have other options. Learning more about how a home equity line of credit works and what you can use it for can help you determine if this product meets your needs when it comes to tackling a large project or coping with an unexpected expense.

What Is a HELOC?

HELOC stands for Home Equity Line of Credit. Different than a home equity loan, a lump-sum payment with a fixed-interest rate, a HELOC functions almost like a credit card; you do not borrow a lump sum all at once but rather get a total line of credit that you can then borrow against as you need to. A home equity line of credit differs from an unsecured credit card in one important way; the HELOC is secured with the equity in your home.

Your HELOC will be for a set time frame (often 10 years) and you can draw on it when you need to. If your home needs a new air conditioner, you want to update your bathrooms or you have another improvement in mind, you can begin without delay, simply by using funds from the HELOC.

How Does a Home Equity Line of Credit Work?

If you decide a HELOC is right for you,  or . We’ll work with you to determine if this product is a good match for you. Some considerations include the value of your home, the amount of money you owe on your mortgage and your personal financial outlook/credit score. The credit limit you get will depend on the amount of equity in your home.

The process is faster than a mortgage and upon approval you’ll be able to access the credit line your lender has extended. HELOC terms vary; you may have a minimum or maximum withdrawal to adhere to when you make a purchase. You’ll use the funds in this line of credit when you are ready to launch a project.

How Is a HELOC Repaid?

During the term of your loan, you’ll pay back the funds you borrow over time. During the borrowing period, you’ll pay only interest, making the payments affordable and accessible. After that time passes, your total repayment plan can range from 10 years or more, and you’ll pay both principal and interest. There is no penalty for paying off this line of credit early, so many borrowers choose to pay the HELOC off as funds are used.

Advantages of a Home Equity Line of Credit

One of the primary advantages of a home equity line of credit is the built-in flexibility; once your credit limit is approved, you can use your HELOC as little or as often as you need to. A few other advantages include:

• Interest only payments during the initial borrowing period, making this an attractive option for those wary of high monthly payments.
• Long repayment periods ensure that you have all the time you need to pay back your loan.
• Convenience; you can take what you need, when you need it without waiting for approval or applying for a new loan.

You can use your HELOC for other things; while most borrowers draw on a home equity line of credit for home projects, they can be used for other purposes. Emergency repairs and other unexpected expenses can easily be dealt with when you have a HELOC in place.

Potential Disadvantages of a HELOC

Like any financial instrument, a HELOC can present some risk to borrowers; it is important to have the full picture before determining if a home equity line of credit is right for you. A few things to consider include: 

• A HELOC may be more difficult to qualify for than a credit card; you have to have enough equity in your home to borrow against.
• If you plan on selling your home soon, a HELOC is not your best option. You’ll need to pay off the home equity line of credit when you close on the sale.
• Since your home is used to secure the loan, you have to consider it part of your mortgage; if you default, you risk foreclosure, just as you would for your primary mortgage.
• A HELOC can have some additional costs, including closing costs.
  

Is a HELOC Right for You?

A home equity line of credit can provide you with a convenient source of funds, but does have some potential drawbacks to consider. If you want to learn more about HELOCs, are interested in applying or simply want to see what a home equity line of credit looks like for you, , , or contact us here. We’ll be able to talk about some specifics and give you a good idea of what you can expect from the process.