What is a HELOC?
A HELOC(Home Equity Line of Credit) allows borrowers to borrow against the equity they have already built up in their home.
A HELOC has a wide range of applications, including expenses for home remodeling projects and home repairs as well as other large expenses. Although it allows for flexible borrowing and repayment, it also requires borrowers to stay especially disciplined when it comes to taking out funds and repaying their lenders.
How does a HELOC work?
In its simplest form, a HELOC works a bit like a credit card. Borrowers can borrow money up to a certain credit limit set by the lender and then pay back the amount borrowed with interest. This option allows for greater flexibility 鈥 borrowers can even withdraw and make payments on a daily or weekly basis if necessary.
A HELOC is often easy to qualify for as long as borrowers have substantial equity in their home, but staying on top of interest and principal pays is critical to ensure that a borrower doesn鈥檛 default on the loan and subsequently loses his/her home.
How do Borrowers spend HELOC funds?
If Borrowers are approved for a HELOC, lenders may allow them to withdraw money during a fixed time known as a draw period.
Once borrowers' draw period has ended, the lender may let them renew the credit line. If not, borrowers may need to repay the outstanding amount all at once or over a period of time, which is called a repayment period.
How to get a HELOC?
When applying for a HELOC, it is expected to pay hundreds of dollars for appraisal fees, application fees, title search fees, and so on. Thus, borrowers must make sure to take out a loan that is big enough to pay themself back for these upfront expenses.
Although it鈥檚 determined largely by the market value of borrowers鈥 homes and the amount borrowers owe on their mortgage. Just because borrowers have a sizable amount of equity in their home doesn鈥檛 mean they will get a big loan because a HELOC鈥檚 credit limit depends on several factors, including the borrowers鈥 credit and unpaid debts.
If borrowers need more money than a HELOC can provide, it might make sense to consider a loan that doesn鈥檛 use home equity as collateral. But, if borrowers are not sure exactly how much money they鈥檙e going to need, taking out a HELOC is a flexible option for taking out money either all at once or sporadically.
All in all, a HELOC may be a wonderful choice for borrowers at a time when most products鈥 interest rates are generally rising.
