Learn How Your Home Equity Can Help You

Sometimes, large expenses surprise you, like when a storm damages your home's roof or you need another car. As a solution to the unexpected financial strain, you may consider borrowing against your home's equity. One option is a home equity line of credit. We'll discuss the benefits and risks below to better understand if a HELOC is the best solution for your financial and homeownership needs.

How a HELOC Works

Your home's equity can be a powerful financial tool when used carefully, and one way to tap into it is with a home equity line of credit (HELOC). A HELOC works like a credit card, where you have a set limit that you can borrow from. It's a revolving debt account, so you can borrow, repay, and borrow again within the loan's terms.

The major difference between credit cards and HELOCs is that credit cards are unsecured debt, whereas a HELOC is secured by your home as collateral. That means the lender could foreclose on your home if the loan goes into default.

HELOC Pros and Cons

A HELOC can offer unique benefits that allow borrowing at very low rates, but HELOCs also carry specific risks. Understanding these pros and cons can help you decide whether a HELOC is right for you:

HELOC Eligibility Requirements

Reviewing specific eligibility criteria can help you decide if you're ready for a HELOC. For example, most lenders require at least 15% home equity. You'll also want to check these factors:

• Credit score: Is your credit score high enough to qualify?
• Debt-to-income (DTI) ratio: Does your DTI meet the lender's threshold?
• Loan-to-value ratio (LTV): Is your LTV below the lender's requirements?
• Budget: Have you considered whether your budget can withstand future rate hikes?

If you answered yes to these, you may meet the requirements for a HELOC. Make sure you also consider how you want to use the HELOC before applying.

When To Use (Or Not Use) a HELOC

If you're considering a HELOC, review some common scenarios when it may be a good fit and when you might seek an alternative.

A HELOC could be a smart solution to help with:

• Consolidating debts: When you have multiple credit cards with high interest rates, a HELOC can help you pay those off. Ideally, you'll get a lower rate with a HELOC and save money on interest over time.
• Renovations: You can use a HELOC to remodel or upgrade your home. The interest you pay on the HELOC for these renovations can be tax-deductible.
• College tuition: If your kid is heading off to college and needs help covering costs, you can consider a HELOC for it.

A HELOC may not work if you're facing:

• Declining home value: If your home's value drops, the lender may freeze or reduce your limit to make sure you stay within their guidelines.
• Rising rates: If rates are rising, your variable-rate HELOC may cost more each month. If you're not prepared for a higher monthly cost, you may have to reconsider your budget.
• Changes in your financial situation: While it can rarely be predicted, losing your job or a drop in your credit score can lead the lender to pause your credit line or lower your limit.

Compare your options carefully and consider how they could support your long-term financial goals.

HELOC Alternatives

If a HELOC doesn't fit your situation, consider these alternatives:

• Home equity loan: A home equity loan gives you a lump sum (at a fixed rate vs adjustable rate) instead of a credit line, but still uses your home's equity as collateral.
• Cash-out refinance: You may save money with a new mortgage and receive a portion of your home equity as cash. HELOCs and cash-out refinances are very different and which is better depends on many factors of your financial situation, so make sure you understand them both.
• Personal loans: If you're qualified, you may be able to get a smaller personal loan that helps with some projects. Personal loans have higher interest rates than cash-out refinances and HELOCs.

Every financing option has its own pros and cons, so consider speaking with a loan advisor or getting prequalified to better understand what you're eligible for.

Considering a HELOC FAQs

If you're considering a HELOC, you may have other questions. Here's additional information that can help you make a more confident decision:

Can You Get a HELOC if You Still Have a Mortgage?

Yes, it's possible to get a HELOC if you still have a mortgage, as long as you meet your lender's qualifications. In this case (and in most cases), the HELOC is considered a second mortgage or second lien.

Does a HELOC Affect Your Credit Score?

A HELOC can improve or harm your credit score. The initial application is called a "hard inquiry," which will temporarily lower your score, as can consistent missed payments. A HELOC will likely improve your score if you use it to pay off high-interest debts or as a solution for streamlining your finances to make regular, on-time payments.

How Long Does It Take To Get Approved for a HELOC?

The time it takes to get a HELOC can vary from person to person and lender to lender. It depends on how quickly the lender receives the paperwork, whether an appraisal is needed, and how complex the underwriting process is. With Freedom Mortgage, you can get funded in as few as five days.*

Is a HELOC a Good Idea for Debt Consolidation?

Some people may find that a HELOC is a good way to consolidate high-interest debts for savings and simplicity. But keep in mind that it utilizes your home as collateral. Make sure to weigh the pros and cons before applying.

Final Thoughts: Should You Get a HELOC?

You'll want to weigh all the benefits and risks before deciding to apply for a HELOC. However, for many, it's a helpful way to consolidate debt, pay for home improvements, or tackle other large financial goals. If you think it's right for you, you can apply for a HELOC today to confirm your eligibility and start mapping out your plans.

* Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing, or that require a waiting period prior to closing.