How Can a HELOC Help You?
A home equity line of credit, or HELOC, is a revolving line of credit. It’s like a credit card, except your credit limit is tied to the equity of your home and it will place a lien on your property.
Equity is determined by a simple math equation: your home value minus the amount you owe on your first mortgage. If you’ve lived in your home for a few years, you may have enough equity to qualify for a HELOC. Usually, you can borrow up to 80% of the home’s value, minus the amount you owe on your first mortgage.
Like mortgages, the interest rate can depend on several factors including your credit score, your loan-to-value and the amount you wish to borrow.
Similar to a credit card, you can use that credit in increments rather than one lump sum. You can also choose to pay it back in full or on a monthly basis.
HELOCs have two phases to them — a draw period and a repayment period:
- Draw period – the time when you can borrow from the HELOC. You’re required to make payments on the interest and the principal (what you have borrowed) during this time. This usually lasts 10 years and can sometimes be approved for renewal by your lender.
- Repayment period – a time when borrowing is no longer allowed. You must now pay back both the principal and interest of the credit you used. This can range up to 20 years and monthly payments can change based on the rates during that time.
HELOCs are often used for home repairs or renovations, but they can also be used to reduce high-interest debt, pay for unexpected expenses, or serve as a source of income during tough economic times. Some people may also choose to use it to pay for a vacation or new car.
HELOC Pros and Cons
- Control: You can take out as much or as little of your credit limit as you’d like during the draw period.
- Cheap: The interest rate is usually lower than a credit card interest rate, because you’re using your home as collateral for the loan. This means there is less risk for the lender. Oftentimes the intro rates are even lower. This can be especially helpful in times when you need a low-interest lifeline during an unexpected event in your life.
- Flexibility: You can also change some or all of your principal balance (your credit limit) from variable to fixed at any time.
- Consolidate your debt: Pay off all your high-interest debt (like credit card balances or other loans) and reduce your monthly payments.
- Ease: Access your funds through an online account, credit card or checkbook connected to the account.
- Time: The time to pay back the interest and principal is longer than many other types of loans.
- Foreclosure: If you can’t pay it back, you may lose your home. Unlike credit cards, HELOCs cannot be discharged through bankruptcy.
- Adjustable rates: The initial introductory rates may be cheap, but after those six to 12 months are over, the rates can quickly increase, depending on how well the market is doing.
- Closing costs: These are either required to be paid in full, upfront or will be included in your repayment plan. (Tip: Some financial institutions, including Desert Financial, offer opportunities to have your HELOC closing costs waived.)
Should I use a HELOC to help my financial situation?
That depends on your current situation.
A HELOC may be a good choice for you, if:
- You want to make improvements to your home.
- You are looking to consolidate high-interest debt.
- You have a large expense to pay off right away.
- You have a lot of equity in your home.
A HELOC may not be a choice for you, if:
- You’re using it to cover basic needs, like groceries and monthly bills.
- Your income is unstable.
- You have little-to-no equity in your home.
Interested in learning more? See if a HELOC from Desert Financial is right for you by contacting us at (602) 433-5626 or download The Handy Guide to Home Equity today. If you’re ready to make your move, you can also apply online!