A Very Useful, But Often Unknown Financial Tool
Quick Reference: If you are looking to take out a HELOC for some home renovations or other emergent need, please check out the home equity line of credit page.
A HELOC – Home Equity Line of Credit – is a very useful but often under-utilized financial tool. Let’s compare how a HELOC works compared to other options, and when it may be the right choice for you.
Everything You Need to Know About HELOCs
What is a HELOC?
A home equity line of credit, or a HELOC, is a type of loan that is secured by your home. Rather than functioning as a traditional second mortgage, it works more like a credit card. Funds can be drawn whenever you need additional cash instead of taking just one lump sum.
When you are approved for a HELOC by Morgix, you can access the funds at any time so long as it does not exceed the total credit line available.
In other words, a HELOC is a revolving line of credit that uses your home as collateral in case you were to default (not be able to pay it back). You are not limited to using the funds for real estate like you would be with a traditional mortgage – you can use it for anything from paying off other debt to fund your children’s education.
How Much Can You Borrow?
How much can you borrow? It depends on a few factors, including your credit rating and the value of your home.
Let’s take a look at an example:
If your credit history allows you to qualify for a HELOC of up to 80% of your home value, and your home is worth $200,000, you could theoretically borrow up to $160,000.
Here’s the catch though – if your existing mortgage balance is $130,000, the bank will limit your credit line to $30,000.
Repayment and Interest Rates
The repayment terms vary, but a 30-year schedule is very common. When you apply for a HELOC, you can choose how long you would like the credit line to be available.
Some HELOCs offer an interest-only period, where you are only required to pay back the interest portion of the balance. If this is a 30-year term, the interest-only period can be up to 10 years. At this point the credit line is frozen and then you must pay back the principal plus interest for the remaining 20 years.
Depending on your terms, you may be required to repay the entire loan at the end of the draw period – and if you sell your home, all of that money becomes due immediately.
HELOCs almost always have variable interest rates, which means they will fluctuate over time according to an underlying benchmark. In 2019, HELCO rates averaged just above 5.5% – much lower than the average of 8.75% for home equity loans.
You may be able to pay to lock in your rate which is helpful in a rising interest rate environment, but it will cause you to pay a higher rate.
On top of interest rates, you must also consider additional expenses like:
- Closing costs
- Appraisal fees
- Other applicable charges.
How is a HELOC Different from a Home Equity Loan?
HELOCs are often confused as being the same thing as a home equity loan, but they are very different.
While both let you borrow against the equity in your home, the home equity loan only provides a one-time lump-sum payment. It also requires you to start making fixed monthly payments immediately.
On the other hand, a HELOC is a line of credit that you can pull from many times so long as the total balance is within your limit – you also generally do not have to begin paying principal until the end of the draw period.
Benefits of a HELOC
There are many benefits to a home equity line of credit, and it may be the best option for certain situations.
Perhaps one of the biggest benefits of using a HELOC is the low-interest rates. They often offer much lower rates than unsecured credit cards, personal loans, or home equity loans. They also let you borrow as needed and in various amounts, and you only pay interest on what you borrow.
Another advantage of using a HELOC is flexibility. There are no restrictions on what you use the funds for, and there is significant freedom when it comes to repayment terms!
One of the best use-cases for utilizing a HELOC is for making improvements to your home. If the renovations will add significant value to your property, this will preserve your equity even as you draw on the HELOC.
It also makes sense when consolidating high-interest rate credit cards. If your HELOC ranges between 5% to 6%, it is still significantly lower than consumer cards that can top over 20%! You can use a home equity line of credit to reduce your monthly payments and pay off the debt at a much faster rate!
A HELOC provides several advantages if used properly. Remember, it is secured by your home, so you have to be sure that you can afford the payments.
Morgix is available to determine what you are eligible for, please feel free to contact us, or simply use the application page to get started on your HELOC journey today!