A home equity line of credit is also called a HELOC. A HELOC can be helpful to a homeowner in a variety of situations. However it can also be detrimental if not used properly. Let me explain what a HELOC is, how it can be used, and what you would have to have to qualify for one. Let’s go.
What is a HELOC?
Simply put, a HELOC is a loan that you can take out on your house that is separate from your mortgage. But this is no ordinary loan. A HELOC is a home equity line of credit. Which means that you can use this line of credit as you choose for a given period of time similar to a credit card.
With a credit card, you can rack up a balance then pay it down, rack up another balance and pay it down again, and so on.
A HELOC works similarly. The main difference is that with a credit card, it is considered unsecured debt. Meaning that you get charged a higher interest rate and if you don’t pay your bill then there is nothing for the credit card company to repossess.
But with a HELOC, if you don’t pay your bill, you can lose your house. Your house is the collateral for the loan.
Why You Might Consider a HELOC
Before I get into why you might want to consider a HELOC, let me preface with saying that I am generally pretty debt adverse. I don’t think that you should borrow against assets very often. In certain circumstances as a business dealing, maybe. However, I don’t think that the general run-of-the-mill homeowner should get a HELOC.
If you need the money, I would first suggest saving up if possible for your expense. And if that doesn’t work, then get some type of a side hustle or have a career change.
I know that is usually easier said than done, but don’t fall into the trap of taking out a loan each time something big happens in your life. Do what you can to pay for those expenses out of your ordinary income or savings. Not debt.
But with that being said, here are the main reasons that people take out a home equity line of credit:
- Home improvements (by far the number one reason)
- College expenses for kids
- Debt consolidation
- Emergencies
- Wedding expenses
- Business expenses
- Continuing education costs
How Do You Get a Home Equity Line of Credit?
In order to get a home equity line of credit, you will have to go through a bank just as if you were applying for any loan. It doesn’t have to be the lender that holds your current loan, however. It can be any bank or credit union that offers this product.
With getting a home equity line of credit, you will have to have your credit pulled, give paystubs, verify employment, etc.
Additionally, the lender will need to verify some things about your house. They will need to verify the address, size of the house, size of the lot, etc.
And also, they will probably need to do an appraisal as well. This may or may not be covered by the lender. Each lender will vary on the amount or even if you will have to pay for one.
You will also have to have at least 15% equity in your home (at a minimum).
How does a Home Equity Line of Credit Work?
Remember when I said that a home equity line of credit works similar to a credit card? Well, that was only mostly true.
Yes, you can draw on the line of credit and then pay it down, draw out some more and then pay it down again, etc. However, there is usually a time limit on it.
Typically, you will have a 10-year draw time and a 10-20 year repayment time.
So let’s say that you got a home equity line of credit on January 1, 2024. You would have until January 1, 2034 to draw on that money. During those ten years you would only have to pay the interest that the loan accrues. Not the principal if you didn’t want to.
At the end of those ten years (January 1, 2034) you would have to start paying back the loan as if it were a second mortgage on your home (because it would be). The payments would be based on the interest rate, the amount that you borrowed, and the time that you had to pay it back. Just like any other loan.
Final Thoughts
A home equity line of credit can be a useful tool in some circumstances. However, make sure to not rely on debt to live your regular life. Do what you can to pay for your life’s expenses out of the money that you earn, not your home.
You can do this!
I am here for you!
Until next time!
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