A Home Equity Line of Credit (HELOC) can be a flexible and cost-effective tool to gain access to your home’s equity. The equity in your home is the difference between what you owe on your mortgage and the current value of your home. A common misconception is that a HELOC can only be used to finance home improvements but it’s much more flexible than that. Although home improvements such as replacing windows, updating summer landscaping or finishing a basement are popular reasons to obtain a HELOC, there are no restrictions on how your home’s equity can be used. You can use a HELOC to consolidate debt, pay for an education or to access cash without cash advance fees often charged by credit cards.
When considering if a HELOC is right for you, we recommend you ask the following questions of yourself and of your lender:
How do you plan to repay the money you borrow?
- Some HELOCs have a low (often interest-only) minimum payment requirement for a period of time that will increase at a set date in the future. Make sure you’re comfortable with the maximum possible payment based on the amount you intend to borrow.
Are you comfortable putting your home on the line?
- Failure to repay could result in you losing your home – just like it does with a traditional mortgage loan.
- If home values decrease, you could end up owing more than the home is worth.
Does it make sense to borrow the equity in your home for your intended purpose?
- Most people choose not to finance day-to-day expenses and instead use their HELOC for major purchases and expenses.
What are the up-front, out-of-pocket and on-going expenses with maintaining a HELOC?
- Look for origination fees/closing costs, advance fees, interest rate lock fees, early payoff penalties or annual fees.
What are the repayment terms?
- A HELOC may have a variable, adjustable, or fixed rate. If variable, when does it adjust? What is the maximum and minimum rate possible? What are the payment requirements – interest only or fully amortizing? Is there a balloon payment?
The following link offers some great advice and resources. Before shopping for a HELOC, take a few minutes to understand the ins and outs of obtaining and using a HELOC.http://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf