What is a HELOC and is It Right For You?
You’ve secured the home of your dreams and built up equity. And now it may be time to borrow against that equity in a way that makes life better: maybe it’s to make that home improvement you’ve been putting off, to finally buy that new car, or to send your kid to college.
Next to the purchase of the home itself, deciding to take out a HELOC, or a home equity line of credit, is undoubtedly a big decision you’ll make in the lifespan of owning your home. We’ve done the hard work for you to define what a HELOC is so you can determine if it's right for you.
1. What is a HELOC?
A HELOC, or home equity line of credit, functions almost like a credit card. You’re given a line of credit for a specific time frame (typically 10 years) which is called the draw period. A homeowner can draw money against that lump sum during that period. During the draw period, the borrower will pay only interest on the loan.
After the draw period is over, it’ll be followed by a repayment period, which will typically span anywhere from 10 to 20 years.
2. How does a HELOC work?
If you decide that a HELOC is the way to go, you’ll first apply with your lender. When determining to approve you for the HELOC, the lender takes a few factors into consideration, for example:
- Your property’s current market value
- Current outstanding debt on the home
- Your income, credit score, and debt
If you’re approved, you’ll get access to the money in one of two ways. One way is that the lender will issue you a set of special checks, where you can cash in various amounts against the loan. The other option is to withdraw money from a credit/ debit card, similar to a card you already own.
Keep in mind that your lender may put parameters on withdrawal, including minimums or maximums, so it's always a good idea to inquire when you apply.
3. What’s repayment like for a HELOC?
During the repayment period, the borrower is required to pay back both interest and principal. The period can span anywhere from 10 to 20 years and beyond. The beauty of a HELOC is that there typically is no prepayment penalty, which, benefits borrowers who are quick to pay their loans back.
Be sure to talk to your lender about specific repayment options and any caveats, should you want to pay the loan back sooner than planned.
4. Are there any major advantages with HELOCs?
Interest-only payments to start? Long repayment periods? Are HELOCs too good to be true? As with any major financial decision, there are pros and cons.
A major advantage of taking out a HELOC is the ability to take what you need. You can draw against the sum during a specific timeframe. And you’ll only pay back what you use. And taking out a HELOC doesn’t impact your first mortgage interest rate either. You can also draw on a HELOC more than once: perhaps you’re set on a small kitchen renovation that will cost about $5,000 now. But what if your car suddenly dies and you need to get a car quickly? That’s where a HELOC comes in handy.
Where HELOCs shine lies in their flexibility and convenience. You can close on your HELOC completely online which makes it all the more quicker for a lender to qualify you for a HELOC. No more taking off work or arranging for a babysitter so you can visit a slew of lenders. Best of all, can close on a HELOC anytime, anywhere.
5. What about risks or disadvantages of a HELOC?
HELOCs on their own are not inherently risky but there are a few factors you should take into consideration. HELOCs tend to be tough to qualify for. Borrowers need sterling credit scores, low debt, and have equity in the home to borrow against. Lenders have a tendency to loan more conservatively on HELOCs due to these factors so it’s always a good idea to talk to your lender to see if you qualify.
A HELOC has the potential to add an unnecessary speed bump in the lifetime of own your home. For example, if you end up refinancing your home or going as far as selling it, you’ll owe the outstanding balance of the HELOC in order to sell it. Borrower beware: treat a HELOC as you would a mortgage. If you fall behind on monthly HELOC payments or default on the loan completely, it may affect your ability to refinance later down the line or worse: a lender can foreclose on your home.
But with careful planning, you can figure out if a HELOC is a sound financial decision for you.
6. I’m ready for a HELOC: how should I prepare for the meeting with my lender?
If you’re ready to chat with your lender about your HELOC options, it never hurts to come prepared.
Curious about what monthly payments would cost you? Depending on how much you take out on a HELOC, a HELOC payment calculator serves as a great tool. When meeting with your lender, you might want to ask a few more specific questions that a HELOC payment calculator won’t be able to answer:
- Can I close on my HELOC online?
- Is there a prepayment penalty?
- What will my monthly payment be?
- How long is my draw period?
- How long is my repayment period?
- Is there a minimum amount you have to take out at closing? A maximum?
Take the time to do research and weigh the pros and cons, given your current financial situation to ensure that a HELOC is the right financial decision for you.
Ready to take out your HELOC?
Talk to your lender today and close on your HELOC online.