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5 Benefits Of A HELOC

Interested in making some home improvements, paying for tuition, or thinking about debt consolidation? It may be time to learn about the benefits of how a home equity line of credit (HELOC) can help U.

You may have heard of home equity loans, but a HELOC is another way to borrow money against the equity in your home. “Borrow against your equity” is one of those phrases we all hear and nod along with, but what exactly does it mean?

Let’s break it down, then look at how a HELOC could be right for your current needs.

 

What Is Home Equity?

It’s actually quite simple. Your home’s equity is the part of your property that you’ve already paid off and/or the amount it has grown in value. Lenders calculate home equity by subtracting your remaining loan and mortgage amounts from your home’s appraised value.

 

How Do You Build Equity In Your Home?

There are two ways to build equity: paying the monthly payments on your mortgage and increasing your home’s value through upgrades and regular maintenance.

 

So What Are You Doing When You Borrow Against Your Home Equity?

The amount you’ve paid on your mortgage is your stake in your home. It’s all yours. If you’ve paid off $100,000 on your property, that part of the mortgage is yours to borrow against, using the home itself as collateral.

 

How Do HELOCs Work?

When you take out a line of credit on your home equity, it works more like a credit card than a personal loan.

The features of a HELOC include:

  • A credit limit from which you can borrow for a draw period of up to 10 years
  • Revolving credit as you pay down the principal
  • Two kinds of HELOC payments: paying off both principal and interest, or just paying off the interest
  • A 10 year repayment period in which both interest and principal must be paid off (this is called an amortizing payment)
  • Your home is used as security

 

What are the Benefits of a HELOC?

There are significant benefits to HELOCs. If the idea appeals to you, it’s important to remember there are also some risks. But if your finances are in order, it might be the right option for you.

 

1. You can control how much and when you take money out

You have a high degree of control with a HELOC that you don’t have with the lump sums and fixed interest rates that come with home equity loans. A HELOC gives you a line of credit you can use when and how you choose.

Better yet, because you control how much you withdraw from your HELOC, you can keep your payments manageable and timely.

 

2. The payment options are flexible

As we mentioned above, HELOCs offer flexible repayment options. You can choose to pay off both principal and interest or simply pay off the interest during the initial term.

 

3. You can spend the money on whatever you choose

Whether you want to pay off high-interest debt, buy a boat, or cover unexpected expenses, you have the power to spend the money the way you want. Of course, we caution against taking out a HELOC for something short-term like a vacation or celebration, since your home is on the line if you can’t make your payments.

 

4. The interest may be tax-deductible

If you use a HELOC to pay for significant home improvements, the interest you pay can be tax-deductible. (Doesn’t that bathroom renovation or new pool addition sound so real now?)

 

5. The interest rate will be lower than most credit cards

Using your HELOC to pay off your credit cards makes good sense. Even with the variable interest rates, the rate on your HELOC will likely be well below your credit card interest rate.

All this said we want you to understand that a HELOC is going to come with risks. If your income or home value drops, your line of credit limit could be reduced. The variable rate on HELOC interest payments can also be a drawback – or a benefit, depending on your situation. However, if you’re secure in your finances and confident the equity in your home will continue to build over time, a HELOC can be a fantastic option.

 

How Do I Apply For and Set Up a HELOC?

When you apply for a HELOC, lenders look at your credit score and income. A high credit score and a large amount of equity both count in your favor.

At UMe, members can now borrow up to $400,000. Our HELOC QuickApp gives you a jumpstart on the path to financial flexibility.

UMe may obtain desktop appraisals for loans with 60% loan-to-value (LTV) and a loan amount up to $200,000. In this process, an appraiser can conduct an appraisal valuation from their desk by looking at a detailed report. This report can consist of property photos, tax records, and other data, often compiled by software or a digital platform.

The LTV is a ratio that helps lenders determine risk by dividing the mortgage amount by the appraised property value.

Once you’ve obtained a HELOC, you can borrow multiple times on an as-needed basis. It’s similar to a credit card, where you borrow only the amount you need when you need it, then make payments on that amount. That means those home repairs, tuition payments, and lower interest rates are going to be within reach.

All of us at UMe want to empower U to take control of your finances. Now that you know more about home equity, borrowing against the value of your home, and what makes a HELOC different from a home equity loan, you are more prepared to make smart decisions about your future.

 

Learn more about Cash out refinance vs HELOC