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- A real estate equity line of credit, or HELOC, is one way you can turn your home ownership into cash.
- HELOCs allow you to withdraw funds for an extended period of time and make interest-only payments.
- But a line of credit is insured with your home, and interest rates and monthly payments can fluctuate over time.
A home ownership line of credit – more commonly referred to as a HELOC – is one option for homeowners looking to take advantage of the value of their home for money.
Unlike other options, Hilux Introducing a Credit Limit – Allows you to withdraw more money, pay it off and then withdraw it as needed over an extended period of time. While this can be the right strategy for some homeowners, there are drawbacks as well.
Here are the pros and cons to consider before taking out a HELOC.
What is a hilock?
HELOCs allow you to convert a portion of your home ownership into a line of credit, which works much like a credit card.
During the withdrawal period (usually 10 to 15 years), you can withdraw and replenish the funds as you see fit, with only interest payments being made in most cases. Then, once you enter the repayment period (usually 10-20 years), you will start making your lender’s monthly principal and interest payments.
HELOC Pros and Cons: At a Glance
HELOCs offer homeowners a wide range of benefits. But they also have some notable drawbacks. Be sure to consider these before taking out a HELOC in your home.
Here are more details about the advantages of HELOCs.
1. You can withdraw money for many years
One of the biggest benefits of HELOC is that it gives you expanded access to cash. You can withdraw $10,000 here, another $30,000 there, pay it off, and withdraw more. This makes HELOC great for covering recurring expenses (like tuition fees, for example) or unexpected repairs, medical bills, and other fees that may come up in the future.
Esther Phillips, Senior Vice President and Director of Sales, Home Mortgage Services. “It’s a good option if the funds are only needed for a short period of time or if you’re not sure how much you need and when.”
2. You only pay interest on what you borrow
Another advantage of HELOCs is that you only pay interest on the money you actually withdraw. If your credit limit is $50,000, but you only use $20,000, you will be charged interest on only the $20,000 — not the full limit.
This helps reduce long-term interest costs, especially compared to other loan options, which usually charge interest on the entire loan amount from day one.
3. You can use the money however you like
There are no restrictions on how you can use funds from HELOC. Many homeowners use them for repairs and renovations, while others use them for expenses completely unrelated to their homes — such as taking a vacation or debt consolidation.
“The main advantage of HELOC is that it has the same flexibility as a credit card,” says Deb Gontko Klein, Chandler, Arizona, branch manager. Reliability in Lending at Primary Residential Mortgage Inc. “You only pay for what was used and you can pay it off and use it again as needed for home improvement, remodeling, landscaping, your son’s college, or even paying off high-interest credit cards.”
4. High loan limits
Depending on how much equity you have in your home, HELOCs can provide access to very large amounts of money. Some lenders actually offer up to $500,000 in financing – far more than most other financial products can offer.
As Adam Boyd, Head of Mortgage Lending at Citizens Bank, explains, “HELOCs generally offer larger loan amounts and lower interest rates than unsecured loans, credit lines, and credit cards.” The amount you ultimately qualify for depends on the amount of equity you own and your credit score.
5. Payments start low
Most HELOCs only require interest payments during the withdrawal period, which can keep the monthly cost low. This can be useful if you are on a tight budget or need to maintain cash flow. Just keep in mind that your payments will increase to include interest and principal once you enter the repayment period.
6. Interest may be tax deductible
In some cases, you may be able to deduct HELOC annual interest costs from your federal tax return. This is only the case if you use the borrowed money to “buy, build or significantly improve your home”, According to the IRSSo keep that in mind if you’re aiming for a tax deduction.
Says Heather Harmon, President of Upendor FinanceOnline mortgage broker.
Here are more details about the cons of HELOCs.
1. Variable rates
HELOCs have variable interest rates, which means the rate they charge can change. These rates are usually linked to the base rate. When that rate goes up or down, the rate on the HELOC goes up as well. This can make budgeting for payments difficult, as it can change frequently.
“Budget your worst case payments,” says Klein. “Estimate your payment numbers with rates increasing by 1% to another 2% so you are well prepared when rates go up.”
2. Later repayment shock
Although HELOCs allow low payments and interest only during the withdrawal period, this is not always a good thing, especially if you withdraw large amounts of cash. In this case, you may find yourself facing a big jump in payments once you enter the repayment period.
3. Your house is on the line
HELOCs use your home as collateral. While this can mitigate some of the risks for the lender and allow them to offer lower rates and more favorable terms, it is also a risk. If you don’t make your payments, the lender can foreclose your home to pay off the debt.
“It’s important to make sure you’re ready to manage your credit line responsibly and have room in your budget to vary your monthly payments,” Harmon says.
4. There may be prepayment fines
Some lenders charge a fee if you close your HELOC too quickly after opening it. In some cases, the lender may also charge you a fee for any closing costs they have covered on your behalf.
“HELOCs are best suited for homeowners who plan to stay on the property for a few years, as some lenders will impose prepayment penalties if the loan is closed in the first two to three years,” Boyd says.
5. You may pay ongoing fees
HELOCs often charge an annual maintenance fee, transaction fee, and other running costs that you will need to pay for the life of the loan. There may be an inactivity fee if you go a long time without withdrawing funds.
Frequently Asked Questions
HELOC is a line of credit guaranteed by your home. You can withdraw and repay the funds several times during the withdrawal period – usually 10 to 15 years. Equity loans give a homeowner a down payment at once and cannot be renewed; Payments start immediately after. Both allow you to convert your home ownership into cash.
The exact requirements for a HELOC vary by lender, but you can usually expect to have a credit score in your mid-60s or higher, at least 10% to 15% of your home equity, and a low debt-to-income ratio, which means your current loan and debt payments Do not consume too much of your monthly income.
You can get HELOC through many banks, credit unions, mortgage lenders, and online lenders. You will need to fill out an application, agree to a credit check, and submit some financial documents. The lender may also request a home appraisal to confirm the value of your property.
HELOC is usually a second mortgage. The term “second mortgage” simply means that the lender has a secondary right to the property if you default on the loan (the primary right passes to the primary mortgage lender). If you no longer have a primary mortgage – meaning you own your entire home – a HELOC can be your first mortgage instead.
Hilux has many benefits. They can give you expanded access to cash – and possibly large amounts of it – and only pay interest on what you withdraw for the first 10 years or so.
Despite these perks, there are also some major drawbacks to these products. Namely, prices and payments can fluctuate, and not paying on time can put your home at risk of foreclosure. If you are not sure that you can manage the ever-increasing payments, it may be better for you to get a loan that offers fixed rates and payments, such as home equity loan.