There are many wonderful things about being a homeowner. You’re part of the American dream of owning a home, you’re free to design the interior any way you want and money that you would otherwise be spending on rent now pays the mortgage, which benefits you and not someone else.
There’s an important additional perk that can help when you need financial flexibility – equity. By unlocking the power of your home’s equity, you can fund home improvement projects, consolidate debt, pay college tuition, or take care of other major expense. The most common way to accessing your equity is through a Home Equity Line of Credit or HELOC, which is offered at Travis Credit Union and other financial institutions that are mortgage lenders.
What is a HELOC?
A HELOC is a revolving line of credit that draws funds against your home’s equity. The amount you can borrow depends on the property value of your home, your mortgage balance, and your credit worthiness. You can withdraw funds as you need them and repay them month-to-month.
A HELOC typically has a 10-year draw period that allows you to make interest-only monthly payments, although you can pay more each month or pay off the balance if you like. The interest rate charged on a HELOC will be influenced by the Federal Reserve Overnight Lending Rate, which fluctuates depending on market conditions. HELOCs come with variable interest rates, so your rate may rise or fall throughout the draw period.
Once the draw period has ended, you will enter the payment period, during which you are no longer able to borrow from the HELOC. Your monthly payments will now include both interest and principal and will generally be spread out over a 20-year term, although this will vary by lender.
What can you do with a HELOC?
A Home Equity Line of Credit provides you with a powerful financial tool that can be used for a variety of things. For those focused on home improvement, you can use a HELOC for major upgrades to your home and property, such as a kitchen or bathroom renovation, a new deck or pool, state-of-the-art appliances, and much more.
HELOCs are also a terrific way to consolidate debt. For example, if you are juggling several credit card balances or small loans, you can use a HELOC to combine those balances, so you’ll have a single monthly payment with generally a lower interest rate. (Remember to close or avoid using those credit cards once you pay them off, so you don’t build up debt again!)
Another use for HELOC is to pay for college expenses that aren’t covered by student loans, grants, or family gifts. HELOCs typically come with a book of checks, so you can write a check for tuition, room and board or any other college-related expense.
HELOCs are a great standby for unexpected or emergency expenses that you might not be able to pay for right away. They give you the ability to address the issue immediately and provide peace of mind that you’ll have time to pay off the expense.
Pros & Cons
Of course, there are pros and cons about establishing a Home Equity Line of Credit. You should weigh these concerns before deciding if a HELOC is right for your unique financial situation.
Reasons For a HELOC:
- HELOCs may offer a lower interest rate than credit cards and personal loans, saving you money.
- Interest payments may be tax-deductible if used for home improvements. Consult your tax advisor for details.
- Ability to borrow only what you need, as you need it. The draw period gives you the ability to only use what you need, instead of receiving a single lump sum of cash at the start of the loan.
Reasons Against a HELOC:
- Your home is used as collateral for the HELOC, meaning there’s a second lien on your property. If you default on a HELOC, the property could be used to repay the loan.
- Interest rates will fluctuate, based on the Federal Reserve. Rates could go up during the time you have a HELOC, costing you more to borrow.
- There is a risk of overspending. Because HELOCs allow you to make interest-only monthly payments for 10 years, you could overspend and then have problems making the monthly payments, especially after the draw period ends.
- Your home’s equity will be reduced by the amount you borrow from your HELOC.
Where to Get a HELOC
You can apply for a HELOC with your current mortgage lender or any other financial institution that offers mortgage loans. It is a good idea to shop around for the best rate and conditions. According to NerdWallet, some financial institutions may require a credit score of 620 or higher, a debt-to-income ratio below 40% and a home with at least 15% equity.
There is a limit to the amount you can borrow on a HELOC. Most lenders will allow homeowners to borrow up to 85% of the home’s value minus the existing loan balance.*
Travis Can Help
Ready for a HELOC? Apply at Travis Credit Union and one of our knowledgeable financial representatives will assist you through the entire application process. Visit a branch or apply online.
Unlock the power of your home’s equity today!
*Source: Bankrate, 7 reasons to use home equity, July 2022