A Home Equity Line of Credit, also known as a HELOC, is a revolving line of credit that allows you to have access to cash to pay larger expenses. Much like a credit card, a HELOC provides credit up to a predetermined limit and allows you to withdraw funds when needed. HELOCs are typically a more affordable way to borrow than a credit card because your home is used as collateral, which significantly lowers the interest rate for the borrower and the risk to the lender.
Are you wondering whether a HELOC is right for you? Here are three questions to ask yourself before you apply.
Does your home have equity?
Home equity represents the current market value of your home minus any remaining mortgage balance. For example, if the current market value of your home is $300,000, but you still owe $240,000 on it, you have $60,000 in equity. Because lenders typically require that you own a minimum of 20% of your home before you can take out a Home Equity Line of Credit, you’ll want to ensure that your loan balance is 80% or lower before you apply.
Do you need a flexible credit option?
Unlike Home Equity loans, HELOCs let you access cash over time as you need it. You might use one for long-standing home repairs with unforeseen costs. Or you might use it to ensure you have cash available in the event of an emergency. Some borrowers even use HELOCs to pay tuition or student loans, or to consolidate debt. However you decide to use them, HELOCs are a flexible way to quickly tap into funds at your discretion. As an added bonus, many HELOC lenders offer an interest-only repayment period to keep payment options flexible, too.
Are low interest rates important to you?
We know that the obvious answer is “yes.”
Interest rates on HELOCs are typically lower than those of personal consumer loans,second mortgages and Home Equity loans. Though HELOC rates are often adjustable and thus subject to change, they can cost less than a Home Equity loan for borrowers who withdraw small amounts over time and pay back the principal quickly. Interest rates on HELOCs may also be tax-deductible, providing borrowers with even more ways to save. Check with a tax specialist for details.
On the whole, home equity lines of credit offer many advantages over traditional credit cards and even Home Equity loans.
The above article was written by Brett Levine, Member Relations Specialist at Direct Federal. Have a question about a Home Equity Line? Brett can be reached at 781.433.2900 extension 227. You can email Brett by clicking here.