Is a HELOC Right for You?

Over 42 million homeowners with existing mortgages have built equity in their home, according to CNBC. That is, their home is worth more than they owe.

With an anticipated shortage of realty in the upcoming year, HELOC loans have been incredibly popular because they offer a way for homeowners to complete projects and improvements on their existing home without purchasing a new home.

Further, the rates on HELOCs have been attractive enough that they offer a way for consumers to minimize other debt, consolidate, or pay for things with a far lower rate than most credit cards.

What is a HELOC?

HELOC stands for “home equity line of credit” and is a type of loan where you draw funds as you need them and repay the money at a variable interest rate.

“Home Equity” refers to the value of your home relative to what you owe on the mortgage. For instance, if you owe $100,000 on your home, and it’s valued at $250,000, then you have $150,000 in equity.

When you apply for a HELOC, your banker will take this equity into consideration. If you own more than 20 percent of your home, you can apply to borrow up to 80% of the home’s equity. As with the example above, if your home is valued at $250,000, 80% of the value is $200,000. Your mortgage balance is $100,000, so you could possibly qualify for a $100,000 HELOC ($200,000 value – $100,000 mortgage).

How is a HELOC different than other loans?

With a traditional loan, you get a lump sum based on the amount of the loan, and you start paying interest on that full amount right away. Your loan amount is set, and if you need more money for your project, you need to go through the process again and take out another loan.

HELOCs work more like a credit card (but with a much higher fund availability balance), where you have access to the funds as you need them, and you pay interest only on the amount that you’ve taken out.

For example, if you take out a $100,000 HELOC and only need $40,000 for your project right now, you would only pay interest on that $40,000, but would have access to the other $60,000 as your project expenses accrue.

With a HELOC, you are able to draw funds many times throughout the life of the loan, this flexibility makes them a great option for many different scenarios and purposes.

What can you do with a HELOC?

HELOC loans are incredibly versatile, making them a great choice for a lot of different options. While many use a HELOC for home improvement projects (to reap the tax benefits), many still use them for other projects or goals. Some of the most common ways customers use HELOCs:

• Remodel their home
• Make the down payment on a second home or cabin
• Pay for a wedding
• Consolidate credit card debt
• Fund medical expenses
• Start a new business

As you can see, this loan type is incredibly versatile and valuable as you consider your existing debt or projects and how a HELOC could help with that. Further, you don’t have to choose just one project for your HELOC. As long as you stay within your financing limits, you could do multiple projects or debt consolidations within the same line of credit.

How does the interest work?

Almost all HELOCs have adjustable interest rates which are typically tied to the Prime Rate. As the Prime Rate moves up or down depending on economic conditions, so does your HELOC rate.

Wondering if a HELOC is right for you?

You don’t need to decide alone. Meet with one of our Deerwood Bank mortgage experts to go through your options, the pros and cons, and decide together what makes the most financial sense for your current situation.

Our team of bankers want to make this (and all your banking) nice and simple.