Key Facts to Know Before Applying for a HELOC

March 29, 2023 by Spectrum Credit Union

If you have lived in your home for a while, you’ve likely built equity. While that means you’re closer to finally paying off your mortgage (hooray!), you can also harness the power of your equity by borrowing against it.

One option, a home equity line of credit (or HELOC), can let you tap into your equity to cover expenses like home improvements or debt consolidation. But is it a good idea? Here’s what you need to know.

What is a HELOC?

HELOC stands for home equity line of credit, which is a type of loan that allows homeowners to borrow money against the equity in their homes. It is a revolving line of credit — like a credit card — that allows you to withdraw funds as needed and pay back the borrowed amount over time.

How does a HELOC work?

When you open a HELOC, you’ll receive a line of credit you can draw against up to your credit limit — similar to a credit card with two notable differences: draw periods and repayment periods.

During the draw period, which typically lasts around 10 years, you can borrow money from the HELOC as needed, up to the credit limit. You can usually access the funds through a check, debit card or online transfer. As you borrow money, you will start accruing interest on the outstanding balance.

During the repayment period, which typically lasts up to 20 years, you must pay back the borrowed amount plus interest. You can make minimum payments, pay off the entire balance at once, or pay more than the minimum to reduce the interest charges. As you pay back the borrowed amount, your available credit in the HELOC will increase, up to the original credit limit.

HELOCs usually also have variable interest rates, which means that the interest rate can go up or down over time based on changes in the market. However, since a HELOC is a secured loan, it may offer more attractive interest rates than other borrowing options.

How much can I borrow?

Your borrowing limit will depend on a few key factors about your home and your finances.

Lenders set their own requirements for borrowing. You’ll usually need to complete a credit check and verify your income to determine if you’re eligible for a HELOC. Your credit profile can also impact the terms and interest rates you’re offered.

You’ll also need a fair amount of equity in your home to use as collateral. Lenders typically allow you to borrow up to a certain percentage of your home equity, such as 80% or 90%, depending on the lender's requirements and your creditworthiness.

Keep in mind, unlike an unsecured personal loan, a HELOC is a secured loan, meaning that your home serves as collateral. If you are unable to make payments, the lender may be able to foreclose on your home to recoup the outstanding balance.

How do I use a HELOC?

While you can use the funds for practically anything, most homeowners opt to use a HELOC for home improvements or debt consolidation.

If you’re thinking of taking out a HELOC for home improvement projects, be sure to consider:

  • The cost of the project: If the cost of the home improvement project is relatively high, a HELOC can be a good way to finance it without having to come up with a large amount of cash up front.
  • The potential increase in home value: Some home improvement projects, such as a kitchen remodel or bathroom renovation, can increase the value of your home.
  • The urgency of the project: If the home improvement project is urgent, such as a leaky roof or broken furnace, a HELOC can be a good way to get the necessary repairs done quickly.

If you’re planning to use a HELOC for debt consolidation, consider:

  • Interest rates: One advantage is that the interest rates are typically lower than other forms of debt, such as credit cards or personal loans. Compare the interest rates of your current debt with the interest rate of the HELOC to ensure you will save money by consolidating.
  • Total debt: HELOCs usually have a maximum borrowing limit based on the equity in your home. If you have a significant amount of debt, you may not be able to consolidate all of it with a HELOC.
  • Repayment terms: Make sure you understand the repayment terms and can afford the monthly payments before taking on the debt.

Spectrum offers competitive interest rates, low closing costs and fixed repayment terms from 5 – 15 years. You can apply for a HELOC online today. Not sure if a HELOC is right for you, yet? Our mortgage loan officers are here to help. Give us a call at 888-750-4124.

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