Helpful HELOC Facts
Your home
provides solid shelter and comfort. But it can also help pay for life’s
expenses. If you are a homeowner and you have paid down a chunk of your
mortgage, having a home equity line of credit, or HELOC, could be a good way to
tap into extra funds when you need them.
Here are
some basics on how HELOCs work and how to know if one is right for you.
1. The amount of financing is based on
your home’s value. When you apply for a HELOC, you’re offering your home as
collateral, and many financial institutions will lend as much as 80% to 85% of the home’s value
minus the mortgage balance.
For example,
say your home is worth $300,000 and you owe $200,000:
●
80% of home value: $240,000
●
Amount owed on first mortgage: ($200,000)
●
The difference: $40,000
So you
could obtain a HELOC of up to $40,000 in this scenario.
2. You are not charged interest until you
withdraw money. Once you are approved by a lender like Alta One Federal
Credit Union, you do not have to spend HELOC funds right away. You also do not
have to start paying interest until you use the line of credit.
Paying
back a HELOC works differently than with other types of financing. The line of
credit may have a term of around 10 to 20 years, and the first part of that
term, which could be five to 10 years, is generally a “draw” period. During
this time, you could borrow against the line of credit and may only have to pay
back the interest on the financing you use. After the draw period, you may no
longer borrow against the credit line and you start paying back the principal
plus interest.
Because
of this feature, your monthly HELOC payments may initially be lower than if you
took out a fixed home loan. But the line of credit payment could increase by
the latter part of the term. And it is important to make your payments, because
you could lose your home if you default.
HELOC
interest rates can vary based on the markets, just as with credit cards. But
generally speaking, they are lower than credit card
interest rates. During the HELOC application process, you may have to
pay fees normally related to applying for a home loan.
3. Interest can be tax deductible. Because a HELOC is secured
by your home, you could receive a home mortgage interest deduction on your
taxes. Interest fees are generally tax deductible up to $100,000 for lines of
credit taken on first or second homes.
4. HELOCs are often better for multiple
purchases. If you
know you need a chunk of money for one set purpose, like to remodel a kitchen,
then a loan may be an easier option. But if you need access to different
amounts of cash several times, say for repairs around the house if various
appliances break down, and to cover medical expenses, then a HELOC could be
your best option.
5. They can also be better for unexpected
expenses. HELOCs
can be good if you need a safety cushion, in addition to your savings, to prepare for unexpected
bills. With a regular home loan, it could take a few weeks for approval, which
means it would be weeks before you receive any funds. And once you receive the
money, you have to immediately start paying back the home loan with interest,
which means it would not be ideal to save for emergencies.
But if
you are approved for a HELOC before an unexpected event occurs, you could have
quick access to the line of credit and could use it at a moment’s notice.
If you
own your home and have equity, a HELOC is an excellent source of funding. By
understanding what it is and how it works, you will have the tools to help
decide if a HELOC is the best product to meet your needs.
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