Owning property is an excellent investment, but it’s also often a long-term one. While you might have tens of thousands or even hundreds of thousands of dollars worth of equity built up in the value of your property, it’s often difficult to access that equity without selling the property. However, there are ways that you can turn the equity in your property into liquid resources through what’s called a home equity line of credit, or HELOC. Here’s what you need to know about HELOCs, how they work, how to get one, and how to use one effectively.
A home equity line of credit (HELOC) is a revolving line of credit that allows you to borrow money against the equity you have in your home. This means that you can borrow money up to a certain limit and repay it as you wish, as long as you make the minimum monthly payments. HELOCs are typically offered for terms of 10 or 15 years, and the interest rate is typically variable.
HELOCs often have lower interest rates than some other common types of loans. Additionally, in some circumstances, the interest on a HELOC may be tax deductible, though this isn’t universal. Because of the advantages of a HELOC, you can use them for refinancing loans at lower interest rates or for when you need a large amount of capital for major purchases, such as a new vehicle or renovations on your home.
In order to qualify for a HELOC you will need to own a property first, as the line of credit is taken out against the equity in that property. You’ll also need to meet certain additional requirements, such as having a good credit score, a steady income, and enough equity built up in your home to justify the lender offering you a HELOC. However, just as it is with every loan, the specific requirements you’ll need to satisfy will vary from lender to lender, so it is important to shop around and compare offers before you choose a HELOC.
Once you have found a lender that you feel offers you the best possible terms, you will need to apply to that lender for a HELOC. The lender will then review your application and determine if you qualify for the line of credit. If you are approved, the lender will provide you with a loan agreement that you will need to sign. Once the loan agreement is signed, the lender will disburse the funds to you. You can use a HELOC for any purpose, such as for home improvements or debt consolidation. If you have medical, education, or retirement expenses, you can also use a HELOC for these purposes as well.
A home equity line of credit isn’t the only option open to you if you want to access the equity in your property. You can also seek a home equity loan, often referred to as a “second mortgage”. These two types of lending are similar, but there are some major differences between the two. This means one might be better suited for your needs than the other. Here’s what you should know about both.
The typical HELOC is flexible, in that you can borrow money up to your credit limit and repay it as you wish. Interest rates are competitive, typically lower than credit card interest rates, and interest is tax deductible in certain situations. However, those interest rates are also variable, which means that they can go up or down over time. Additionally, there are typical closing costs associated with a HELOC, which can add to the overall cost of the loan. There also may be early repayment penalties associated with a HELOC, so be sure to read the terms and conditions carefully before you sign the loan agreement.
Second mortgages are much more rigid than HELOCs, in that you receive the entirety of your loan in one lump sum instead of being able to use it like a revolving line of credit. This means that a second mortgage is useful for large, one-time expenses like purchasing a second property or paying for a wedding. However, a second mortgage’s payments are usually not as susceptible to variable interest rates as HELOCs are, which makes them a more attractive choice if you’re looking for a standardized monthly repayment schedule.
Repaying your HELOC can take many forms. Often, you have a period of time where you can access the funds (called the “draw period”), which usually lasts several years before the repayment period on a HELOC begins. Once this happens, you can repay your HELOC in a variety of ways, such as making monthly payments or paying off the balance in full. However, as mentioned above, be sure to check if there are early repayment penalties associated with your HELOC. You can also consider refinancing your HELOC if the interest rates have gone down since you took out the loan.
A HELOC can be a great way to access cash for a variety of purposes. However, it is important to understand the terms and conditions of the loan before you sign up. Be sure to shop around and compare offers from different lenders to get the best interest rate and terms.