Home Equity Line of Credit
Have you ever wished you could just write a blank check for anything you needed for your home? Bathroom needs new vinyl? No problem, just call the guy. Fridge goes out? Just go to the home improvement store and get one of those fancy models with the touchscreen in the door. Fortunately, this kind of thing is possible with a home equity line of credit, as we explain below. If you don’t want to suffer through all the painful examples, though, contact the home.loans team directly and we’ll give you the short explanation.
Home Equity Line of Credit Basics
When it comes to recapturing the equity in your home, there are basically two ways to do it. You can get a home equity loan, which forces you to take a big loan out all at once (and which may leave you destitute down the line) or you can use that equity to create a home equity line of credit. A home equity line of credit works much like a credit card in that you only spend the amount you need to spend, rather than being forced to spend it all at once.
So, let’s say your lender approves a $25,000 HELOC. You want to buy that fancy fridge, which is just shy of $5,000 with delivery and installation. Pop on down to the store and run your card, and you're done! You now have to make a payment on just $5,000, not on the $25,000 credit line, so if you need the rest later, it’s there -- but you can also just let it float along. You can leave that amount open for the entire draw period if you want, or choose to use it here and there for things around the house. Rather than being forced to take more than you need, you can decide what’s right for your financial situation.
Pros and Cons of HELOCs
Home equity lines of credit can be much safer loan products than a home equity loan for owners looking to access their home’s equity. Since you can access funds as you need them, there’s less pressure to take everything you can at once. Here are some other things to consider:
Pros and Cons of Home Equity Lines of Credit
|Borrow only what you really need. Something happens to people when they’re told they have a single shot at a thing, like borrowing from their equity. They want to make sure they don’t make a mistake, so they go big or they go home. This can get you into trouble, fast. With a HELOC, you open a credit line, giving you options to borrow more money down the line.||Adjustable rates can make repayment unpredictable. Most HELOCs have adjustable rates, so they can be unpredictable in the long run. If your lender gives you the option to convert to a fixed rate, do it.|
|Feels more like a credit line. You’ll even get a piece of plastic that looks like a credit card. Use your credit line anywhere your debit card is accepted.||Can be easy to overspend. Because it’s easy to think of a credit line like a free bag of money, it’s also easy to spend it on stuff you’d not normally buy. Instead of dumping money into the SodaStream Pro V.2.0, look for something that will enhance the value or attractiveness of your home. Keep good records on what you spend from the credit line, too, to remind yourself to spend it responsibly.|
|Interest-only payments may be an option. During your draw period, the time during which you can borrow against the credit line you’ve established, you may be able to just pay the interest part of the payment. This eases you into making a new payment, giving you more chances to succeed.||Encumbers your home with new debt. Just like with a home equity loan, a HELOC creates a new loan that’s secured by your home’s equity. This cannot be overstated. If you fail to pay your HELOC payment, you can lose your home. This means that if you start to get in trouble with the extra house payment, there’s no option but to pay it however you have to.|
Who’s the Ideal Borrower for a HELOC?
Creating a credit line that allows you to tap into your home’s equity as needed is often a smarter move than taking a lump payment, simply because it forces you to think about the whole credit line differently.
The borrowers who will succeed in this situation:
Have shown a track record of managing credit successfully.
Carefully plan their spending, especially when it comes to borrowed money.
Are able to make an extra payment on their home with no trouble.
Can stay in their home over the long term if the market tanks before equity is restored.
There’s always the risk of ending up upside down when you take out an equity loan of any type. HELOCs are not immune to this particular situation. If the HELOC is for home upgrades prior to sale, make them swiftly, then put your home on the market. Lingering for years heaps risk upon risk that the equity you borrowed is going to trap you in your home for a very long time.
WHAT TO LOOK FOR IN A HOME EQUITY LINE OF CREDIT LENDER
Once you’ve found a few lenders with rates that suit your budget, it’s time to reach out to them. This part of the process is the most important. Interacting with your prospective lenders allows you to ask the questions that don’t get answered by a simple rate offer. Such questions include:
What are the associated fees (if any)?
Are there inactivity fees?
Are there prepayment fees?
What are the exact details of the interest rate you’ll be expected to pay?
Is there an introductory rate? If so, how long does it last?
Will there be an interest rate cap?
Is there a minimum withdrawal amount per transaction?
Is there a general minimum amount that must be borrowed?
How long is the draw period?
Will there be a balloon payment?
When you’re confident in your choice of lender, and satisfied with the rates and terms, you can begin the application process for your HELOC.
Some lenders offer an online application, giving you a little more flexibility in gathering the required documentation. Others, however, may only accept applications in person at a local branch.
Home Equity Lines of Credit: In Review
While home equity lines of credit can be helpful, taking out an equity loan should only be done when you’re absolutely certain you’re prepared for the long term financial ramifications. That can mean a bigger loan payment, sacrifices you’ll have to make as the HELOC’s rate adjusts or significant enough drops in housing values that the cash you took out makes it hard to sell your home in the near-term.
If you’re prepared for the doom scenarios, HELOCs can be excellent tools for slow remodeling, large landscaping projects or even fun stuff like outfitting your home with lots of smart technology. Since you can take a little bit out here and there, you can spread your expenses out over time, even pay some of the loan down before you spend again.
HELOCs can help you get more done at home, if you have the financial fortitude to weather any storms that might come your way. Not everyone knows what to expect, though, and that’s why Home.Loans is here, waiting for you to contact us to help you through it. It’s free and you’ll save us from another straight hour of listening to Bad Lip Readings on YouTube.