November 9th, 2022 12:54 PM by Jackie A. Graves
With a HELOC, you can borrow as many times as you need to up to your limit and you’ll only pay interest on what you spend.
Over time, your home can become a powerful financial tool. As property values rise and you pay down your mortgage, you build home equity — the difference between what you owe on your home and what it’s worth on the market. Lenders may allow you to borrow against this value, giving you access to money you can use for a variety of financial goals, like fixing up your home, covering medical bills or sending a child to college.
You can borrow from your home equity in three main ways: a home equity loan, cash-out refinance or home equity line of credit (HELOC). In this article, we’ll go over how HELOCs work, their advantages and disadvantages, and some reasons you may want to use one.
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What is a HELOC?
A home equity line of credit, commonly known as a HELOC, is a flexible way to borrow against the value you’ve built up in your home. It’s a type of credit line that functions much like a credit card. When you open up a line of credit, the lender gives you a maximum amount you can borrow based on how much equity you have in your home. Then you can spend from this account up to your limit, typically using checks or a card connected to the account.
HELOCs begin with a draw period, when you can use your line of credit as many times as you like. You’re usually only required to make small payments during the draw period, often paying only the interest. Then you’ll enter your repayment period, when you’ll pay back the full amount you spent, plus interest. HELOCs are typically repaid with a variable interest rate, which can go up or down based on the market.
This sets HELOCs apart from other ways you can borrow against your home equity, like a home equity loan or cash-out refinance. With a home equity loan, you borrow a lump sum of money based primarily on how much equity you have in your home. You’ll immediately start to pay back this loan, usually with a fixed rate.
With a cash-out refinance, you take out a new mortgage that pays off and replaces the one you currently have. Your new mortgage is for a higher amount than you currently owe, with the difference coming to you as cash.
What can you use a HELOC for?
You have a few restrictions on what you can use a HELOC for. In general, you can use the money however you wish, though your lender may have rules on how you access your account. For example, you may be required to make a minimum initial draw when you first take out the HELOC, or there may be a minimum amount you must borrow each time you use the line.
Here are six reasons why people use HELOCs:
Because your property is at stake, home equity lines of credit are best used for critical needs rather than day-to-day spending or extravagant purchases. Think carefully before taking out a HELOC or using the line of credit you have. The more you spend, the higher your monthly payment will be.
What are the advantages of a HELOC?
HELOCs have a number of advantages over other ways you can borrow money, including:
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What are the disadvantages of a HELOC?
A HELOC may not be the best option in every situation. Like any type of loan, home equity lines of credit also have their disadvantages, such as:
How to get a home equity line of credit
Taking out a HELOC is a relatively simple process, but it’s important to get it right. These steps can help you get the best home equity line of credit for your financial situation:
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