Need a Loan? Shop Around for a HELOC
What is a HELOC?
There are unique advantages to applying for a home equity line of credit (HELOC) to help cover unexpected expenses. It’s not uncommon for homeowners to face sudden financial burdens, such as a busted water heater, and find that they don’t have the savings to cover the expense.
Alternatively, it may be time to replace the roof, remodel the kitchen, or perform some other type of home improvement. While a refinance home loan might be one option, it might be more advantageous to apply for a HELOC.
The Basics of a HELOC
When you refinance a home loan, you’re bound by specific terms and you must take the full loan amount in one lump sum. However, when you apply for fixed rate home equity line of credit, you’re borrowing against the equity you have in your home and you can use the money as you need it.
As a result, it functions more like a credit card than a second mortgage. While you can only borrow up to your approved limit, you can use the funds however you choose. You can use it to make home improvements, but you can also use it to pay for your child’s education or finance a big vacation.
One of the best home equity line of credit features is that you only pay interest on the amount you actually borrow. For instance, if you’re approved for a $100,000 home equity line of credit, but you only borrow $20,000, you’ll only be responsible for repaying the $20,000. That is also the sum that your interest will be based upon. That interest will also be lower than the interest you would pay on a traditional refinance loan, so this will help you save money on the amount you do borrow.
How Does a HELOC Work?
When you apply for a HELOC, you’ll be required to supply your lender with much of the same information that you would supply when requesting a second mortgage. The best equity line of credit you can receive will be based upon how much equity you have in the home, the property’s appraised value, your level of income, and the amount of debt you owe.
While there are a variety of repayment terms, the 30-year repayment plan is the most common. However, this is different from a traditional 30-year mortgage. The first 10 years is called the draw period. During this time, you can borrow as much as you need up to your approved limit, as you need it. You’ll only be responsible for making interest payments throughout this period.
Once the 10-year draw period has elapsed, the account is frozen and you enter the repayment period. At this time, you will be expected to make principal and interest payments. In a 30-year HELOC, you’ll make these payments over the next 20 years, completing your obligation to repay the amount borrowed.
Read the Fine Print on Your HELOC
It’s important to understand the terms of your HELOC ahead of time. For instance, a 10-year HELOC might seem like the best home equity line of credit option, but you may not realize that your full balance must be repaid at the end of that 10-year period. Shorter repayment periods often accompany shorter draw periods, so be aware of your terms in advance.
When you do take out a fixed-rate home equity line of credit, you should be aware that selling your home will affect any repayment plan. Regardless of the terms of the HELOC, you will be expected to repay what you owe upon selling the home. Since your line of credit will be based on the equity you have in the home, this shouldn’t pose a big problem. You will have to make sure you make enough on the sale of the home to repay both the interest and the amount borrowed.
Just as you would shop around for a mortgage lender, you will want to spend looking for the lender offering the best HELOC. When you do find the right lender for your situation, take the time to learn as much as you can about the terms of your HELOC. It can be helpful to write down your questions so you don’t forget anything. Since this can be a considerable amount to borrow, it’s important to understand your obligations in advance.