Sixty-five percent of Americans are homeowners. For many, their most valuable financial asset is their home. If you are among them, there may come a time when you need access to the equity you have built up in your home. A Home Equity Line of Credit (HELOC) could be just the answer.
Here are three things you need to know when considering a HELOC:
What Is a HELOC?
A HELOC is a revolving, secured line of credit, that uses the equity in your home to enable you to borrow money. Instead of receiving a lump sum up front, you are approved for a line of credit you can draw on as needed. HELOCs offer flexibility around both borrowing and repaying money. You can take what you need when you need it, and use it for any reason. Upfront costs are relatively low. The interest on a HELOC is variable, and calculated daily rather than monthly. As with any line of credit, applications are considered based on your credit score, debt to income ratio, employment, and payment history, in addition to the equity you have in your home.
How Does It Work?
Once approved for a HELOC, you have a set amount of funds available to draw from over a specific period of time. You can borrow up to 85% of your home’s equity. There are two terms to the HELOC: the draw period and the repayment period. During the draw period, generally 5 to 10 years, you only pay interest, and can withdraw funds as you need them. After the draw period ends, the HELOC enters the repayment period, which typically lasts 10 to 20 years. At this point, you are no longer able to borrow, and must begin to pay back the principal plus interest. Interest payments may be tax deductible if you use your HELOC funds for qualified expenses.
Is a HELOC Right for Me?
From a financial planning standpoint, HELOCs are best if you use the money to make improvements to your home and increase its value. However, you can use the line of credit for any purpose. Some take out a HELOC to consolidate high-interest debt, pay for college, even take a vacation. Remember that you are using your home as collateral. Which means if you are unable to make your payments on the loan, you could lose it. Property value declines can also impact your line of credit. Because the interest rate is variable, your monthly payment amount can change. And when you reach the repayment period, your payments due will increase significantly. Review your budget to ensure you can afford fluctuations.
Calculating the equity you have built up in your home is easy. Take the current estimated value of your home and subtract the amount you owe on your mortgage. If you think a HELOC is the right financial option for you, contact First Federal to learn about our offerings!