What is a HELOC?

April 3, 2019 By ,

There comes a day in every homeowner’s life when you want to undertake a home improvement project that exceeds your bank account. Whether it involves hiring a contractor to build your dream kitchen or you just need a new roof doesn’t matter. What’s important is the specific loan product you select; specifically, should you go for a home equity loan, or a HELOC?

Many people’s first instinct is to apply for a home equity loan. A home equity loan is a second mortgage on your home. If you qualify, the lender provides the total amount in one lump sum check or direct deposit. After that, you’ll have two monthly mortgage payments on the home for 10-15 years on average.

But savvy borrowers are opting for HELOCs. These home equity line of credit products are different from traditional home equity loans. If you qualify for a HELOC, the lender provides you with a line of credit which can even include a debit card to cover the cost of renovations or repairs.

Rather than pay monthly amounts and interest on the total amount borrowed, you pay only on the actual funds used to date. That makes it more similar to a credit card and a far more practical way to borrow.

Important HELOC Details

Although HELOCs are quite simple in terms of accessing funds and paying on only what you withdraw, there are a number of differences between them and traditional home equity loans. These are essential items to consider.

  • Fluctuating Rates: It is not uncommon for some lenders to offer low introductory rates that may increase quite a bit. Pay close attention to HELOCs with varying rates and know their potential uptick.
  • Period Terms: Some HELOC products allow you to withdraw funds for a set amount of time. Once that deadline is reached, lenders generally expect repayment going forward. The line of credit often has a set time limit for repayment in full.
  • Balloon Payments: There are products that offer repayment with interest for up to 10 years. Once that time has expired, a final balloon payment comes due. This can cause borrowers to refinance.

But the burning question most people want to know is: how much can you borrow?

Borrowing Limits

The majority of HELOC products use a formula to arrive at the highest amount someone can borrow. A typical amount runs upwards of 80 percent of the home’s appraised value, after deducting your existing mortgage.

In rare cases, lenders may be willing to offer 100 percent or even 125 percent of the appraised value.* This can be a risky option that could result in borrowers owing more than the home is actually worth.

For homeowners interested in making upgrades or repairs, the HELOC offers solid benefits. Lenders have a variety of products with differing rates, fees, and payment options. It may be worth shopping around to select the best HELOC for your goals and finances.

Do you have questions about how a HELOC might work for you? Fill out the form below or contact us today!

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*The interest on the portion of credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal Income Tax purposes

*The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges

 

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