A HELOC allows an individual to borrow against the equity of their house.
What Does HELOC Stand For?
A HELOC stands for Home Equity Line of Credit and uses your home as collateral to borrow money against your home’s equity. If your home is worth more than you owe, then you can use that equity to pay for home improvements, pay off high-interest credit card debt and personal loans or pay for a large expense like a car, medical bills or college tuition.
How Does a HELOC Work?
Unlike other home equity loans or a cash out refinance loan, a HELOC is a credit line where you control how much you borrow and when you want that cash. You don’t have to take it all out at once. This is good for an expense like a college tuition where you need money yearly. Once approved, you will have a pre-determined maximum borrowing amount, which is how much equity you are approved to borrow. Most of the time the bank will require you to maintain a certain amount of equity in the home.
The main distinction of how a HELOC works, is how you pay it back and how much you owe over time. There are two phases—the draw period, which is between 5 and 10 years and then a repayment period that runs between 10 and 20 years. During the draw period you only have to pay interest on what you take out. When repayment happens, you pay interest plus principal. This makes a HELOC more affordable upfront, but costs will increase over time. Keep in mind interest rates on a HELOC are variable and based on market conditions so the interest you’ll be paying can change throughout the draw and repayment periods. A HELOC may be more beneficial for borrowing in the short term and for home improvement projects that could increase your home’s value.
What Are the Pros & Cons of HELOC?
With a HELOC, you are essentially taking out a second mortgage and borrowing against the equity in your home, so if home values decrease you may end up paying more than your home is worth. That could impact your ability to sell and move in the future, so if you’re looking to move sooner you may want to consider other options.
It’s important to note that with a HELOC your home is used as collateral, so if you have unexpected expenses that crop up like medical bills or you lose your job, you also risk losing your home if you can’t make the payments.
Is HELOC Right for You?
Besides a HELOC, there are other ways to get cash from your home’s equity, including a cash out refinance loan or a home equity loan. Learn more about the differences of these loans. You can also contact a Freedom Mortgage home loan specialist who can walk you through your options and help you determine the best solution for your financial needs.
Still have questions? Contact Freedom Mortgage online or by phone (877-220-5533) today and speak with a loan specialist to see what options might be best for you.