A home equity line of credit, or a “HELOC” is a simple and flexible way to borrow for larger purchases, investments, debt consolidation…just about anything really.
So, what makes a HELOC different from other types of credit? A HELOC is secured by the equity in your home. We’ll explain.
If you’re a homeowner, as you pay down your mortgage you build up what’s called equity. Put simply, equity is the difference between the value of your property, and the mortgage you owe on it. So, if you have a property that’s worth $500k, and a mortgage of $350K, you have $150K in equity.
A HELOC is secured by that equity. In other words, the financial institution that you borrow from uses your property as security.
If you’re thinking about borrowing, there are some good reasons to consider a HELOC.
1. Flexible, revolving access to credit
Flexible is the name of the game with a HELOC. You borrow what you need, when you need it, and pay it back as you like.
Of course, you’ll have to pay monthly interest on what you borrow, but you don’t have to make lump sum payments like you would with an installment loan (unless you want to, of course).
And if you do borrow from your HELOC, you can pay back as much as you want without incurring any penalties or prepayment charges.
A HELOC is also easy to use. In most cases you can withdraw funds directly from an ATM, or transfer between your accounts online.
2. Less risk, which usually means a lower rate
A HELOC is considered less risky to lenders than unsecured types of credit. Why? Because if you don’t pay back what you borrow, the financial institution can take your property, liquidate it, and apply the proceeds to your debt.
Because it’s less risk for the lender, chances are you’ll get a much lower interest rate.
Good for the lender means good for you!
3. A potentially higher limit
If you need to borrow funds for something big, the HELOC is likely the way to go. The higher credit limit allows for major purchases, and the lower interest rate makes carrying larger debt manageable.
Financing home improvements, for example, can be costly. What if you have to pay for materials in advance? What if something unexpected happens and you go over budget? Easy access to funds during a project can save you a ton of stress.
4. You only pay interest on what you borrow
Yet another feature that makes the HELOC manageable. First, if you don’t use your HELOC, you pay nothing each month. And, if you do use it, you’re only required to pay the interest owing each month.
You can pay more if you like, but at minimum, you’ll be charged interest on what you borrow on a monthly basis.
5. You never have to reapply
The easiest thing about a HELOC is, it’s always there when you need it. You apply once and use the funds whenever you like.
If, over time, you build up more equity in your home and you want a higher HELOC limit, you can apply for an increase, but generally, it’s set it and forget it.
Even if you don’t use it, it’s available if something comes up – home renovations, education costs, emergencies, investing, debt consolidation - anything.
Never having to reapply means that whatever happens over the years, you have access to credit if and when you need it. Whew.
Learn more about the motusbank HELOC