What is a HELOC and how does it work?

Searching online for a loan can bring up a multitude of options, but how do you know which one is right for your situation?

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This article will tell you the basics of what you need to know about a Home Equity Line of Credit or HELOC. A HELOC can be a great way to finance large expenditures, such as a home remodel or college tuition. Sometimes borrowers will use a HELOC for debt consolidation, since the interest rate and draw period typically offer better terms than a credit card.

How HELOCs works

A HELOC is a loan that is based on the amount of equity you have in your home. The maximum loan amount will be determined by a variety of factors, but most important is the value of your home. Over the course of a draw period, or the amount of time the loan can be accessed, you will have the ability to withdraw money from your line of credit based on the maximum loan amount your financial institution has set. A HELOC can be loosely compared to a credit card, where there is a set amount you are able to spend within a period of time, with options for a longer or shorter payback period.

HELOCs typically have a draw period, during which the borrower can use the line of credit, and a repayment period during which the loan must be repaid. Draw periods usually range from 5 to 10 years, during which the borrower typically makes interest-only payments. Repayment periods usually range from 10 to 20 years, at which time the borrower makes payments on the balance of the loan, divided by the number of repayment months. The repayment period is similar to how many other loans work. There are some HELOCs that require the entire balance be repaid at the end of the draw period, so the borrower must refinance at that point if the remaining balance is too high to pay back.

 

Before applying for a HELOC, consider these things:

HELOC annual percentage rate (APR): What is the interest rate on the loan and is it a variable or a fixed rate? Calculate the interest on both options and be realistic about your repayment plan before selecting the interest option that works best for you.

Upfront cost of taking out a HELOC: Are there any underwriting fees associated with the loan, or other one-time payments that will be rolled into the loan? Shop around at multiple financial institutions to make sure you are getting the best package deal for your particular situation.

Qualifying for the loan: To qualify for a HELOC, you must to have available equity in your home. This means that the amount you owe on your home must be less than the value of your home. Typically, you can borrow up to 85% of the value of your home, minus the amount you owe. A lender generally also looks at your credit score and history, employment history, monthly income, and monthly debts, similar to when you first got your mortgage. Be aware of the fact that a HELOC is secured by your home equity. If you don't repay it, you could end up in foreclosure.

Interest deductibility: Unlike credit card interest, HELOC interest is tax deductible unless you are subject to the alternative minimum tax or take the standard deduction instead of itemizing. Consult your tax professional to be sure of your particular situation.

Having a realistic repayment plan: Before applying for a HELOC, have a plan for repaying the money you borrow. Make sure you understand the terms of the loan and repayment period, to make sure the loan is feasible for you to pay off during that time.

After doing some research and speaking with a financial expert, you might find that a HELOC is the right option for your situation. Before you take out the loan, think about your past financial habits. If you are able to control spending and budget your payments, a Home Equity Line of Credit may be the right option.

 

Contact us today for more information.

 

Not all members will qualify for a mortgage with Nymeo. You must qualify for membership with Nymeo to be considered for a loan. Credit decisions are based on several factors, such as creditworthiness of applicant(s), capacity to repay, and value of collateral.

 

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