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Pros and Cons of Home Equity Line of Credit

Admin — Tue, 10 Jan 2023 12:04:21 +0000

Every homeowner is known to have great equity and is trying to make a home equity line of credit which is HELOC. This is the best option to get low-cost financing in the market. However, the main reason behind the rise in the prices of homes is that more than 50% of mortgaged residential properties were taken as equity rich, which means mortgages or other home loans covered no more than the ½ of their value.

On the other hand, earlier cash-out refinancing was considered the best way to turn equity into cash. But with the increasing mortgage rates, other options have been dragged out of the spotlight.

HELOC or home equity line of credit is known to be a type of loan that is secured by the home or works like a credit card. It is an option that allows you to get access to a revolving line of credit which can further be drawn upon for any reason virtually, like home improvements, debt consolidation, etc. It is flexible and is known to have low-interest rates as compared to various other debt products. This makes it a very popular option for every person or homeowner to easily get funding.

Understand Home Equity Line of Credit or HELOC

A home equity line of credit is known to be a line of credit that is secured by the home you own, which can further be used for anything. HELOC is known to work similarly to a credit card, where you need to continuously tap into the line of credit or go up the credit limit during your draw period. You can easily have access to the entire credit line, where you have the liberty to spend more or less than you want. However, you need to pay interest on the amount that you are spending. This is how it is different from an installment loan like a personal home or home equity loan, which is known to be about receiving the full loan amount and that too in lump sum upfront.

HELOCs are known to work or have a 30-year model where you can get to enjoy a 10-year draw period. During this period, you can easily draw the money out from your home equity line of credit. The rest of the 20 years is where you need to pay off what you have spent. Also, there is other draw periods as well as repayment period, which you can choose.

In case you only have an interest only HELOC, then it is important to make payments that involve the interest and not the principal while you are going through your draw period. The complete principal, as well as interest payments, will begin during your repayment period.

Pros of Home Equity Line of Credit

With this type of loan, it becomes easy to borrow around 85% of the home value, excluding the outstanding mortgage payments. In other words, this type of loan will not work if the borrower doesn’t have enough equity. It is important to have good credit to qualify for this loan and offer income proof to repay the loan.

Here are some of the pros of a home equity line of credit:

Low-interest rate – The exact rate of the loan can be decided after knowing the credit score. But HELOCs are known to have a lower interest rate as compared to credit cards or personal loans. Home equity line of credit is variable-rate products which means their rate is going to fluctuate over some time. But even if their rates rise, it is going to be less as compared to most credit cards as well as personal loans. However, you can easily enjoy low interest rates with home equity line of credit without fretting about anything. Plus, this can make things easy for you in the future.

You can lock in your rate – There are some lenders that provide you with the lock-in option or fix your interest rate on the outstanding balance. This allows you to not get exposed to rising interest rates after piling up the balance. However, this option is not always available, and it can come with some fees or high-interest rates. But can offer some stability to the borrowers to be safe from high rates.

Pay for what you are going to spend – Another benefit of HELOC is like any other credit card, you need to spend what you are spending on a home equity line of credit. This is somehow different from any other option for home equity financing, such as home equity loans, where it is important to pay the whole loan amount, no matter whether you have used it or not. Thus, this makes HELOC flexible and a good option. Ultimately, you get the ability to get into a massive amount of funding if you want it, but you won’t get stuck paying the amount or interest on the loan which you don’t use.

Use the loan for anything – You can easily use the funds or money from a home equity line of credit for anything. It could include common uses like debt consolidation, funding home improvements, getting rid of medical expenses, beginning with a new business, etc. In case you are using the funding for home improvements, then there is a possibility to get a tax benefit. You have the choice you deduct the interest paid on HELOC if you are using it to purchase, build, or even improve your home, which ultimately secures the loan.

Large loan amount – HELOC is known to be a secured debt product where it is essential to use your home as collateral which means you can get large or massive home amounts in comparison to credit cards or personal loans. Also, the borrowing of HELOC also depends on the equity that you own in your home. A lot of lenders require a loan-to-value ratio of around 80% and even less, which means the debts are secured by the home, which includes a primary mortgage, HELOC plan, etc. Ensure that you are not exceeding more than 80% of the home value. However, the borrowing limits can be different by lender and also depends on how much you are earning as well as your credit score.

Introductory offers – There are some lenders that also offer some HELOC introductory offers like waived fees, a lower interest rate for a specific time period, etc. These offers should not be the main purpose of getting the loan but as allow you to save some cash. Ensure that you get to know the offers of multiple lenders and compare the rates and fees of every lender before making a choice.

Flexible repayment options – There is a lot of flexibility when it comes to paying off your HELOC. The timeline of the loan depends on how much you are borrowing and the lender you are choosing. You need to make the interest payments within the draw period, which is initial ten years and can get to enjoy principal payments and a lower balance when you enter the repayment period.

Cons of Home Equity Line of Credit

Overspending risk – The first con of HELOC is overspending risk. If you are not a disciplined borrower, then this can be tricky for you. HELOC allows making interest-only payments while the draw period is going on. It becomes easy to get access to money without keeping the financial ramifications in mind. This way, if you are not returning the fund, the loan can amortize, and the payments can go up.

Set draw period – HELOCs are known to have a set draw period that works in favor of the borrower. The 30-year model includes a 10-year draw period, and the remaining 20 years are for repayment. After getting done with the draw period, you cannot get access to HELOC, and it is mandatory to pay back the funds. This allows you to have enough repayment periods to pay back the loan amount easily. If you are not satisfied with the draw period, then HELOC is not the right option for you.

Simple but long application process – The home equity line of credit is known to have a simple but long application process. It involves a 30-year period which is evident to have a slightly different and lengthy application process as compared to credit cards or personal loans. It can also take a few weeks to get approved for the loan amount.

Conclusion

If you are known to have home equity which you can easily tap into, then getting a home equity line of credit is the best option for you. This is a great way to get massive funds to complete your projects like home renovations, consolidating debts, and much more. The above-mentioned pros and cons of these loans will help you know about HELOC in a better way and will allow you to make a great decision. However, you need to be a disciplined borrower while getting HELOC.

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Everything you need to know before applying for a home equity line of credit

Admin — Sat, 23 Oct 2021 14:25:32 +0000

Home equity line of credit or HELOC is an interesting way to get money on your homes’ value. HELOC allows consumers to borrow money at lower interests and use it for their purposes. The best part of taking HELOC is that you get access to funds once your loan is registered. So, you can straight away put it to use. Borrowers usually prefer HELOC as the rate of interest is significantly lower than that of other mortgage types. Besides that, HELOC offers its customers flexible repayment plans, which act as a relief for the customers. Also, it comes with a unique benefit where the borrower can use it, repaid and use it again buy only paying interest on the part of funds that has been used.

What is HELOC?

It is important to understand what exactly HELOC is before applying for it. HELOC is a line of credit secure by the equity in your home. HELOC allows the consumers to borrow money against the available equity of their homes. Equity in a home means the amount owed by the customer on their home should be less than the value of their home. Usually, the customers can only borrow up to 80% of the equity of their home. The lenders consider a few things before granting the money. These are the score of a credit card and its history, monthly income, and debts, amount remaining on the first mortgage, etc. The repayment system of HELOC works differently than that of a mortgage. It is not fixed like that in a mortgage and can vary according to the lender.

How is HELOC different than a Home Equity Loan?

Home Equity Loans and Home Equity Line of Credit are loans borrowed against the equity of the consumer’s home. And both the loans give a certain percentage of the equity of the borrower’s home as a loan, but there are a few key differences between the two. Home equity loans allow the customers to borrow money in lump sum amounts. This means that you can take home equity loans for big expenses. On the other hand, you can borrow money through HELOC in small amounts. Moreover, it allows you to keep borrowing money up to a certain period. It works like the credit card system. The other difference between the two is that, in Home equity loans, the rate of interest is fixed. While HELOCs have a variable rate of interest and the rate depends on the lender.

How A Line of Credit Works?

A line of credit is a kind of loan to borrow money up to a pre-set limit. You can use the funds of the line of credit for any purpose, and you don’t need to have a specific purpose for using the loan.
In Canada, a home equity line of credit is a safe credit where our house becomes collateral. Usually, the line of credit has a higher credit limit and lower interest rate.
In simple words, a line of credit is a kind of loan where we can borrow any amount of money. And we need to pay the interest on the amount we have borrowed. But we need to make regular payments on the mortgage principal and the interest.
The credit limit on the HELOC combined with a mortgage can be a maximum of up to sixty-five percent of our home’s purchase market value.

Risks OF Borrowing Home Equity Line of Credit:

All of us have heard about HELOC. It is a flexible, convenient, and low-cost way to borrow money. But there is a lot of risks involved in borrowing a home equity line of credit. So we need to be very careful while borrowing HELOC, and we should always know how to manage our HELOC prudently. Because if we remain careless while borrowing money from HELOC, it can become very expensive and put us into financial trouble. There is a risk of rising interest rates which ultimately affects the monthly payments and the total borrowings. And there is no way to predict when the price increase will happen or how much increase will be there. The only way to combat this risk is to pick a home equity loan with a fixed rate. Another troublesome situation that people face is fluctuating monthly payments, which can cause financial instability. Improper HELOC management can hamper our budget, due to which it becomes very difficult to make future financial plans. And in this case, we are unable to predict our monthly payments or the total borrowing costs. If you want to avoid these kinds of troubles, then you should pick a fixed-rate home equity loan option.

So then, what should homeowners use HELOC’S for?

Home renovation- Using HELOC funds for renovating our home can be a smart option. Because the loan borrowed from HELOC works like a credit card, you can do any renovation in your home without worrying about the money just by using the home equity loan. Home equity loans are approved by lenders who allow us to borrow a certain amount of money based on the equity of our project.

Paying high-interest debts– We can use the HELOC funds to clear our high-interest debts because the rate of interest on the home equity line of credit is considerably very low than those of our other loans. So, we can use the home equity line of credit funds to consolidate our high-interest debts. Doing so can help us in simplifying our payments and reducing the interest costs.

Paying for higher educational studies– If you are having a financial crisis and you cannot pay your child’s educational fees. Then applying for a home equity credit line can be the best option. You can borrow money through HELOC to make tuition payments when they are due, and you can pay the debt off over the set repayment time for your line of credit.

Cover Business Expenses- Home equity line of credit has lower interest rates. So, the Business owners can use the HELOC funds to cover their business expenses. Thus, you can also use the HELOC funds to start a new business of your own or to expand an existing business.

Ask Yourself the following Questions before borrowing a Home Equity Line of Credit:

Taking any loan is a big step, and you should make sure whether or not you are eligible to repay the loan before taking it. Here are a few questions that will help you to determine whether you should take the loan or not:

What do I need the loan for?

This is the most important question that you should ask yourself. The reason for taking the loan is very important. You must think about whether you need the loan or not. And if you need it, then whether you need small loans or huge amounts. Because you already know that HELOCs are better for a small loan. Answer these questions for yourself, and then choose the loan.

Will I be able to afford the instalments?

You will get the approximate figure of your instalments from your lender. Once you know the figure, you should take a look at your salary and expenses and then decide whether you’ll be able to pay the instalments or not. Again, these are small but very important points as your house would be at stake here.

What will be the rate of interest?

Usually, the rate of interest of HELOC is variable, and this might make some borrowers nervous. But you do not need to stress because the interest rate is always lower than the other personal loans. It would be best if you asked your provider how the rate would increase or decrease.

Do I already have a credit card or any other debt?

If you are already in debt, then it is not advisable to borrow any more money. You have to be smart while taking home-based loans because your home is at risk in such cases. But if you fulfill all the conditions and need money, you should go with HELOC as it is an easy way to get money on your home’s equity.

Conclusion:

HELOCs can be a good way to tap into home equity. And there are many advantages of HELOC, such as borrowing the amount according to your need, lower rates of interest, etc. But before borrowing money from anywhere, you should always be cautious and take certain measures.

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