Why You Should Consider a HELOC

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Owning a home comes with its own special kinds of opportunities and challenges. You can upgrade it however you want, but you also have to be responsible for any problems that might arise (busted pipes, anyone?). And since you own the home, you’re in charge of paying for those upgrades and repairs yourself. 

Unfortunately, a lot of those projects cost a pretty penny. 

So how do you pay for them, especially the ones that need immediate attention?

Enter the HELOC, or home equity line of credit.

A HELOC is a kind of second mortgage that taps into the value of your home to provide you with a line of credit you can use to fix and update your home. Your lender will set up a credit limit, and you can borrow up to that limit to do what you need to in your home. It’s kind of like a credit card, with your house as collateral. You can withdraw money when you need to, even on a daily or weekly basis, and make payments (with the accumulated interest) as often as you’d like.

HELOCs give you more flexibility with your finances, but how much can you get with a HELOC? Well, that depends on a couple of different factors.

Let’s break down the numbers. 

Say you have a $500,000 house, and you’ve been working hard to pay it off. You currently have $300,000 left on your first mortgage. Most lenders will provide a HELOC that is 85% of your homes equity, minus what you currently owe on your mortgage. It looks a little something like this:

  • 85% of %500,000 is $425,000. So 85% of your home equity is $425,000. 
  • Now subtract the current amount you owe ($300,000). That leaves you with $125,000 as your maximum line of credit.

Now, this also depends on things like your credit score, credit history, and other factors.

HELOC terms vary, and can run as long as 30 years. The terms are broken into two sections: a draw period when you can withdraw funds and use the credit, and the repayment period when you can’t take more money out and have to repay all that you’ve borrowed, plus interest. 

What are the pros and cons of HELOCs?

  • Pros:
    • Pretty easy to get, if you have enough equity in your home and a pretty decent credit history
    • It’s similar to a credit card, which you’re probably familiar with
    • Interest rates on HELOCs are much lower than a credit card
    • And HELOCs are usually less expensive than a personal loan
  • Cons
    • Interest rates are variable, so your monthly payments may be unpredictable
    • There may be an annual fee to keep your HELOC open, even if you don’t use any money
    • Since your loan is dependent on the value of your home, there are some potential dangers: 
      • If you miss payments, you could lose your home
      • If the value of your home falls, you could end up owing more than your home is worth

If you’re not sure a HELOC is right for you, there are other options to consider, the most common of which is a Home Equity Loan. Similar to a HELOC, a home equity loan relies on the value of your home to determine the loan, and your home is used as collateral for the loan. But where you can draw money whenever you need it with the HELOC, the home equity loan is a lump sum given to you all at once. 

Home equity loans do have fixed interest rates, which means you know what the payments will be every month. These kinds of loans are great for large projects and one-time expenses. If you plan on doing multiple projects, or would like to be able to do multiple projects during the length of your draw period, then you should consider a HELOC. 

Have more questions about HELOCs? Talk to a Dime Mortgage Consultant today.

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