What is a HELOC? If you own a home, you may have heard the term before. A home equity line of credit, also known as HELOC, is a type of borrowing mechanism that allows you to make use of your property's value. Whether you're planning a home improvement project, consolidating high-interest debt, or simply looking for a safety net for unexpected expenses, having access to HELOC funds could be an ideal solution for your financial needs.
Exploring the HELOC Basics
At its core, a HELOC is a line of credit where homeowners use the equity in their house for various needs. You can use a set percentage of the value of your home minus the amount you still owe.
Think of it like a credit card; you'll have access to a set amount flexible funds. In the case of HELOCS, however, the funds are based on an existing asset. Instead of receiving a lump sum upfront like you would most loans, a HELOC has a set credit limit. This setup allows you to borrow any amount up to your limit, pay it off, and then borrow again during the draw period. You'll only pay interest on what you borrow, not the entire credit line.
It is important to keep in mind that our HELOCs have a variable interest rate that can fluctuate based on the market. Depending on your circumstances, a HELOC may make a great option for projects or expenses that happen over time, offering a convenient and potentially more affordable way to manage your finances.
HELOCs vs. Home Equity Loans: What's the Difference?
When you consider borrowing against the equity in your home, be sure to understand the difference between a HELOC and a traditional home equity loan—the key distinctions between the two lie in how funds are accessed and how repayment is structured.
HELOCS
- HELOCs offer a revolving line of credit from which you withdraw money as needed up to a certain limit during the draw period.
- HELOCs come with variable rates that can fluctuate over time depending on the borrowed amount and current interest rates.
- There is an initial period where your repayments are interest-only before transitioning to a repayment term containing both principal and interest.
Home Equity Loans
- Home equity loans provide a one-time lump sum to be repaid over a fixed term with a fixed interest rate.
- Our home equity loans are locked at a fixed interest rate for the duration of the loan, which means the payments remain constant.
- Home equity loans require regular payments that include both principal and interest..
The Impact of a HELOC on Your Existing Mortgage
When thinking in terms of payment priority, consider a HELOC as a second mortgage that comes after your primary mortgage repayment. Consequently, having a HELOC can affect refinancing your first mortgage. Lenders could view the additional debt from a HELOC as an increased risk, which could lead to higher interest rates.
If you choose to sell your home, the proceeds will first go to paying off your primary mortgage. Any remaining funds will be used to pay off your HELOC. If there aren’t adequate sale proceeds to pay off your first mortgage AND your HELOC you will need to provide additional funds to do so before the closing can be finalized. Keep in mind that there may also be prepayment penalties for paying off early.
Incorporating a HELOC into your financial strategy can offer several key advantages. It can provide an accessible reserve of funds at a potentially lower interest rate than other credit types, which can be useful for making home improvements that increase your property's value. These upgrades can contribute to building more equity in your home more rapidly.
The strategic use of HELOCs benefits your current financial landscape and can positively affect your long-term financial health by optimizing your home for future financial success.