Your home is likely the most expensive thing you will ever buy. Fortunately, for all that investment, homeownership comes with financial perks and opportunities. One such opportunity is the Home Equity Line of Credit (a.k.a., the HELOC). But what does it mean and how can it help? In a nutshell: If you own a home, you might be sitting on funds that could help you achieve your financial goals.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a type of loan that allows homeowners to borrow against the equity they’ve built in their homes. Your equity is the difference between the current market value of your home and the outstanding balance on your mortgage. The most important thing to note is that HELOCs are secured loans, which means your home serves as collateral. Since HELOCs are secured by your home, they typically offer lower interest rates than other forms of financing.
How does a HELOC work?
HELOCs work like a revolving credit line, much like a credit card. Once approved, you’re given a maximum borrowing limit based on the equity in your home. You can draw funds as needed, up to the maximum limit, during the “draw period” (typically from 5 to 15 years). Some options allow you to only pay interest for the first few years of your loan. Other HELOCs require you to make both principal and interest payments right away.
After the draw period ends, your HELOC enters the “repayment period,” usually lasting 10 to 20 years. During this phase, you can no longer withdraw funds, and you’ll begin repaying your loan (both principal and interest). The interest rate may be variable or fixed, depending on your agreement with the lender.
How can a HELOC help you?
- Home Improvements. HELOCs are most commonly used to fund home improvements that increase property value. Popular upgrades include kitchen remodels, bathroom upgrades, or outdoor improvements (such as a deck, roof, or landscaping).
- Debt Consolidation. If you have high-interest debts (such as credit cards or personal loans) a HELOC can be used to consolidate these debts into a single, lower-interest payment. In the long run, this can help you save money on interest and simplify your finances.
- Emergency Fund. A HELOC can serve as a financial safety net in case of unexpected expenses or emergencies. Then, in the event of an emergency—like a burst water pipe—you can access your HELOC to cover the costs instead of relying on high-interest credit cards.
- Education Expenses. Whether funding your education or helping with your children’s college tuition, a HELOC can provide a cost-effective way to finance education expenses.
- Starting a Business. Entrepreneurs often use HELOCs to finance the startup costs of a new business. When done right, it’s a flexible and cost-effective way to fund your entrepreneurial dreams.
A Home Equity Line of Credit is a versatile financial tool that offers homeowners access to the equity they’ve built in their homes. However, it is important to consider the costs, how you will pay the loan back, and whether there are less risky financing alternatives. If you are curious, reach out to us. We’d be happy to help you compare terms and find a loan that aligns with your overall financial strategy.