A home equity line of credit, or HELOC, is a line of credit secured by your home. A HELOC is essentially a second mortgage that gives you access to additional funds, usually up to 85% of your home’s value minus the balance remaining on your mortgage.
The best reason to get a HELOC is for home renovations or remodeling projects that will increase the value of your home. If you’re interested in how a home equity line of credit can benefit you, let’s take a closer look so you can decide if it’s the right decision for you.
How Does a Home Equity Line of Credit Work?
With a HELOC, you’re borrowing money against the available equity in your home. Much like a credit card, as you repay the funds, the amount of available credit is replenished.
You are given a line of credit that is available for a certain amount of time, usually up to ten years. This is known as a draw period. During the draw period, you can borrow as little or as much money as you want, up to the credit limit you established with the lender. At the end of the draw period, the repayment period begins which is generally up to 20 years.*
HELOCs come in two varieties: one with an interest-only draw period, or one with a draw period where you can pay interest and principal.* The latter option can help you pay off the loan faster.
Why Get a Home Equity Line of Credit?
A HELOC is intended to be used for home repairs and upgrades. The interest on your HELOC may be tax-deductible if you use the money to buy, build or substantially improve your home, according to the IRS.
Why Avoid a Home Equity Line of Credit?
A HELOC should never be used to help you meet financial goals such as consolidating credit card debt, sending a child to college or starting a new business. Though a HELOC may offer a lower interest rate, you risk foreclosure if you aren’t able to pay back the loan. Consider using an emergency fund, taking out a personal loan or signing up for a low interest credit card instead.
Will a Home Equity Line of Credit Affect My Credit Score?
Some bureaus treat HELOCs like installment loans rather than a revolving line of credit. This means borrowing 100% of your HELOC limit may not have the same negative effect as maxing out your credit card. However, like any new line of credit, a HELOC on your report will likely reduce your credit score, but only temporarily.
Qualifying for a Home Equity Line of Credit
To qualify for a HELOC, you need to have available equity in your home. This means that the amount you owe on your home must be less than the value of your home.
A lender will look at your credit score and history, employment history, monthly income and monthly debts, a process similar to when you first got your mortgage.
*Subject to credit approval. Minimum loan amount of $10,000.00. Introductory Annual Percentage Rate (APR) of 3.91% available for 6 months on new lines of credit only. Introductory rate offer not available for refinances of existing Equity Bank Home Equity Lines of Credit. After the 6 month introductory period, the variable rate for owner-occupied HELOC is 6.50% APR. Rate is accurate as of August 24,2018 and is subject to change. Variable APR will change with the market based on the Prime Rate as published in the Wall Street Journal. The APR may change monthly, but will not be lower than 4.75% APR, nor exceed 18.00% APR.
If you made only the minimum payment and took no other credit advances, it would take 20 years to pay off a credit advance of $10,000.00 at an Annual Percentage Rate of 6.50%. During that period, you would make 120 monthly payments ranging from $32.58-54.17. Then you would make 119 monthly payments of $113.55 and one final payment of $115.94.