Are you in need of a little extra cash? Thinking of refinancing your home or getting a home equity line of credit (HELOC) loan? Many homeowners turn to this alternative when a life change forces them to come up with a lump sum of cash. If you find yourself in this position and are considering a home equity loan, you should consider these HELOC tips from North Georgia’s premier CPA firm!
What is a Home Equity Line of Credit (HELOC)?
Borrowing against what will, arguably, be the biggest financial asset you will ever own is big decision, and entering into an agreement to take out a home equity line of credit (HELOC) should be considered carefully. While there are certainly risks associated with taking out a home equity loan, there are advantages too, especially when you need the money for a sudden life-change, such as a job loss or new baby in the home.
A HELOC is, in some ways, like a credit card, in that you are given an “open-ended” line of credit to pull from as needed. This loan is secured, of course, by the equity of you have built-up in your home, providing you a large sum (typically) of cash should you require it.
HELOCs have a limited time of use, normally 10 years. This means that you get a certain amount available to draw from based on your home’s equity, and you have 10 years to use it. Sometimes you have to repay this loan by the end of the draw date, and other times a lender will give you a repayment period – it defers by lender.
Home equity lines usually have a variable interest rate based on the prime rate. The interest will change based on a number of factors, including the borrower’s credit score, your mortgage debt compared to your property’s current value, and whatever other factors the lender sets.
There are technically two types of HELOCs, for lack of a better term. Home equity lines of credit work in the way described above. Home equity loans, meanwhile, offer a lump sum of money at one time, and your rates will typically be fixed. This offers the advantage of a fixed rate and predictable monthly payments, but has less flexibility. In addition, you may never use the full amount of money offered by a home equity line of credit, which could reduce your future debt.
The biggest, most obvious, downside to a HELOC or home equity loan, is that you are using your home as collateral, and such, if you fail to make your payments, you could lose your home. Because of this, you always want to weigh the options of risk versus reward when consider a home equity line of credit.
At the end of the day, you should never consider a HELOC for frivolous things. Expensive vacations, new toys, gifts, and even to start your own business are all poor choices for applying for a home equity line. Debt consolidation of high interest debt, college tuition, and home improvements (if the current and future housing market looks stable) are all normal uses for a HELOC.