What is a Home Equity Line of Credit?
Why should I choose a HELOC? What are the advantages?
How are HELOCs Used?
How much does it cost to get a HELOC?
How much money can I borrow?
What is a Home Equity Line of Credit?
A Home Equity Line of Credit or HELOC, is a type of home equity loan that gives the borrower a revolving line of credit instead of an outright lump sum. The HELOC works just like a credit card in that you only pay interest on the amount you draw against the credit line, while the balance can be slowly paid up for the duration of the loan, typically from 5 up to 20 years. But because it is essentially a secured debt with your home equity as collateral, it charges lower interest rates than credit cards.
Why should I choose a HELOC? What are the advantages?
Compared to a conventional home equity loan, the HELOC may turn out to be more affordable. For one, the current HELOC interest rate is significantly lower than other home loans. Secondly, the upfront costs are also lower than those of the traditional loan, with some lenders even giving no-cost options for a HELOC. Plus, there’s that added option where you can choose to pay only the interest for months at a time. This can come in handy when funds are especially tight or when faced with unemployment.
How are HELOCs Used?
A Home Equity Line of Credit is used in much the same way as a credit card or a traditional home equity loan. Some of the most common uses for a HELOC are for home improvement projects, college education expenses, vacations, for emergency cash, and as a "standby" resource in case of job loss.
How much does it cost to get a HELOC?
Application, appraisal, and closing costs could be charged when taking out a HELOC. However, there are already a lot of no-cost HELOCs available especially for borrowers who have excellent credit history, and those who are securing the loan against the home equity of the primary home. The fees could be considerably higher if you have a low credit score, and are using the equity on a second home as collateral.
How much money can I borrow?
A HELOC should have a loan-to-value ratio of no more than 89.9%, with a maximum amount of $1 million. To qualify for the highest possible loan amount, you would need to have excellent credit.
Home Equity tips
Home Equity Loan vs HELOC
A home equity loan (HEL) is a lump sum of money with a fixed payment plan. A Home Equity Line of Credit (HELOC) is a revolving line of credit, similar to a credit card. Both are loans that borrow against the value of your home.
HELOCs are best for variable long term expenses
If you need a large sum of money over a long period of time, a HELOC may make more sense. Home remodeling projects, medical bills and college tuition are typical expenses that would suit a HELOC over a Home Equity Loan.
