How To Use A HELOC
Homeownership is one of the most significant investments that anyone can make in their lifetime. Luckily, harnessing your home’s borrowing power can help save you money in other areas. A Home Equity Line of Credit — A.K.A. a “HELOC” — can be just the ticket that you need to get your finances on the right track!
In this handy guide, you’ll learn about HELOC basics and how to use a HELOC.
HELOC Basics
Collateral & Risk
Have you ever noticed that mortgage loans and car loans frequently feature significantly lower rates than credit cards and personal loans? That’s because of a little something called “risk.”
When a lender lets you borrow money, your interest rate is risk-based. That means that if there is no collateral to back up the loan, it’s a lot riskier for the lender to allow you to borrow the money you need. So in turn, you’ll end up paying a higher interest rate. This is where a HELOC can help.
Interest & Equity
“I really love paying really high interest rates,” said no one ever. When you’re looking to pay less in interest, your home is your biggest asset. Your home provides the collateral that you need to borrow new funds at a low interest rate.
When you make payments toward your mortgage, you build up equity in your home. After you make those monthly mortgage payments for a while, your home’s value will likely be higher than what you owe. That difference in the amount is what (or how) you can borrow from with a HELOC.
One thing that you may find “interest”-ing is that some HELOCs have variable interest rates. When interest rates are low (which they are currently), so is your monthly payment!
Home Value vs. Borrowing Power
When you apply for a HELOC, your lender will evaluate your home’s value, which is likely done through an appraisal. If the market in your area is in a downturn, this can negatively affect your borrowing power. But the flip side to that is if the market is hot, your borrowing power just might be hot, as well!
Payments
Once you pay off a traditional installment-based loan—like a personal loan—you have to go through an application process again if you want to borrow more money. However, a HELOC is a revolving credit line, much like a credit card. So, once you pay off what you owe, that money is available to borrow again for as long as your HELOC is open and in the draw period.
A draw period is a time during which you can withdraw from your HELOC. Instead of the lump sum you get with a conventional loan, during your draw period–which can last several years–you only make withdrawals when you need them! It’s similar to a credit card, in that you have a credit limit you can borrow up to.
Then, you make minimum monthly payments, which are calculated depending on how much you withdrew.
Now that we’ve got the basics out of the way, let’s talk about how you can use a HELOC.
Using A HELOC
There are many different reasons people take out a HELOC. Need to pay off medical bills? Pay for a wedding? Consolidate debt? Go on a vacation? Landscape your yard? Want to put a new roof on your home? Need to renovate a funky 1970s carpeted bathroom? Or maybe you want to lay carpet down in your bathroom? No judgment. We love that for U! A HELOC can help you do all of these things and more.
Here’s a breakdown of some of the most popular ways to use your HELOC:
Consolidate Debt
One of the most significant ways that a HELOC can save you money is with debt consolidation. When you borrow money on a credit card or personal loan, your interest rate will typically be higher than a loan with collateral behind it.
Moving your balance to a HELOC can help you save with a lower interest rate. Plus, paying off debts with a HELOC can help you get all of your debts into one bucket. This consolidation will allow you to focus on making one payment instead of many.
Decrease Monthly Payments
When all of your debts are in one bucket, you may end up with a lower overall payment. This can mean more money in your pocket. Less money going out to monthly payments means more cash for you to put toward retirement, cover other monthly expenses, and enjoy a little more wiggle room financially.
Extreme Home Makeover
Do you feel like a change would do your home some good? People often use HELOCs for home improvements. It’s an excellent reason to get a HELOC because home improvements often increase your home’s value.
So, using a HELOC for home projects allows you to use your home’s equity to build value. It’s a win-win!
You can modernize your kitchen, add a front porch, or put in a pool. Plus, you can use it to do less flashy stuff, like replace a water heater, air conditioning unit, or kitchen appliance. The options are endless!
In Case of Emergency
Sometimes even the best-laid plans result in emergencies. You can (and should) prep financially for emergencies in other ways, like building an emergency savings account. However, a HELOC can help you cover the costs associated with emergencies when you’re in a pinch.
Feelin’ HELOC-y?
The bottom line is that a HELOC’s use can be as unique as each borrower. Keep in mind that your home is your greatest asset so don’t make the decision to borrow against it lightly. Get advice from a financial professional, like a UMe team member, to ensure that a HELOC is right for you.
At UMe, you can borrow up to $400,000. And, UMe may obtain desktop appraisals for loans with 60% loan-to-value (LTV) and a loan amount up to $200,000.
Still on the fence about if it’s the way to go? Click the button below for help in determining if a HELOC or cash-out refinance is right for you.
cash out refinance vs. helocs