A home equity line of credit (HELOC) is a loan that provides you with a revolving line of credit secured through your home. You can use these proceeds for large expenses that you cannot cover with your current finances.
Many people use this in order to consolidate their debt if high-interest rates are present. This usually comes with a lower interest rate than a credit card, which is what makes it such a preferred type of loan. The interest may even be tax deductible on a yearly basis, which could help ease the burden during tax time.
How Does it Work?
A HELOC allows you to borrow against the equity that you currently have in your home and lenders typically cap the line at 80% of your loan-to-value. In order to gauge how much you can apply for, you can estimate the home value of your home and review your mortgage statement for the current balance. If you currently owe $200,000 and it’s worth $300,000, the loan-to-value would be 67% by dividing the two. Since you can borrow up to 80%, you can take out up to $40,000.
Let’s say you want to take out the entire line amount you can borrow, you would be able to access this whenever you want, only paying back the balance as you take draws. It’s also possible to keep the entire line open for an emergency access to funds without drawing a penny. A HELOC is a great flexible money resource to have if you’re unsure how much exactly you need so you don’t have to take out a loan for the full balance.
What Can I Use the Funds For?
Well, what is home equity? It’s simply another form of untapped liquidity that you have saved up over your lifetime. While it’s not advisable to pull out your hard-earned equity in order to go on a shopping spree, the good thing about a HELOC is that there is no stipulation on what you can use the proceeds for.
While many use to consolidate debt and pay off high-interest credit cards, others find it necessary to fund a long-overdue home improvement project. Since you will have to pay back the balance as you draw funds, it’s still important to make sure the monthly payments will fit with your household budget.
How Does this Differ from a Home Equity Loan?
The concept of drawing from your equity in the form of a loan may be the same on how much you can borrow, but there are a couple of ways a home equity loan differs from a HELOC. First, the loan option is for a full balance that you begin paying back instead of an approved line amount. Next, the rates are fixed, whereas a HELOC is variable. Fixed rates give you the comfort of having the same monthly payments every month, but with a HELOC, if the market rate goes up, you could be looking at a significant payment increase.
