What is a HELOC
A home equity line of credit commonly called a HELOC is a type of financing that pulls value from your home. Using your home’s equity for a line of credit has some risk and you should carefully consider the Pros and Cons before you apply for a HELOC. Some reasons homeowners may consider a HELOC include:
• Debt consolidation
• Home improvements
• Emergency needs
• Business expenses
• Long-term investments
Probably the most common reasons people get HELOCs is for Home improvements. You can upgrade your home or make it more functional to fit your needs. A HELOC might be a resource for aging adults to access some money to do upgrades to make your home safer. You might use your home equity to finance a large, value-increasing home project like a kitchen or bathroom remodel. Strategically the idea is leveraging your existing equity to boost the overall value of your home.
A home equity line of credit is like a credit card. Do not confuse a HELOC with a home equity loan. You have a certain limit up to which you can borrow and you take funds as you need them. You only pay interest on what you draw. With a home equity loan, you're still borrowing against your equity, but you're getting a sum of money all at once. You pay it back in fixed, regular payments.
Here are some of the pros and cons of a HELOC?
Pros of a HELOC
• You may have no closing costs if you have good credit. There are no application fees or appraisal costs either which you typically have to pay those with most standard home equity loans.
• There are no fees for a cash draw. If you were going to use a credit card for a project, as an example, you would have to pay a fee for a cash advance.
• HELOCs offer very low interest rates. They're secured by the equity in your home, which is one reason that lenders offer competitively low rates. They're adjustable-rate loans, which may also help you get a lower initial rate, but this can go up over time.
• Some HELOCs include the option to convert to a fixed-rate loan if you want locked-in rates. If you're in the repayment phase of a loan, it may happen automatically.
• You have flexibility in how you repay your HELOC balance.
• A HELOC is a type of mortgage, meaning your interest is tax-deductible.
• There aren't restrictions on how you can use the funds with a HELOC. You're getting a line of credit with significant flexibility. You don't have to have your lender approve changes either.
Cons of a HELOC
• Since your home is your collateral for a HELOC, you're putting it at risk if you default. You could lose your home if you become unable to make your payments on-time.
• There may be various penalties or fees to be aware of, such as annual fees or inactivity fees.
• Any new loan you get is added to your total amount owed on your home. When you have more equity, you also have more options. If you don't have equity and the value goes down, you might have to keep your property until there's a change.
• One of the biggest downsides of a HELOC is the fact that they are adjustable-rate loans. This means that while your rate could go down, it can also go up. Our interest rates have been pretty steady and have remained at historically low rates. If we have a spike in interest rates, some lenders will convert a HELOC to a fixed-rate loan eventually.
As with any loan, there are Pros and Cons you should consider before deciding if a HELOC is best for you. Make sure to consult a mortgage professional to your personal financial situation and what you want to finance before taking the leap into a HELOC. Please feel free to contact the Sullivan Team at 817-330-9235 for trusted references of mortgage professionals that we work with.
