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Understanding a home equity line of credit (HELOC) is important knowledge for every homeowner. Described as a home’s most valuable asset, home equity is a tool that is useful in establishing a line of credit for many different types of needs. Let’s take a closer look at what a HELOC is, along with its benefits and risks:
Understanding Home Equity
Equity is the homeowner’s interest in the home. In simple terms, home equity is the difference between what you owe on your home and the value of your home in the current market.
What is a HELOC?
A (HELOC) is a revolving line of credit that is secured by your home. Like other lines of credit, a HELOC provides a source of funds that you can draw on as needed. HELOCs vary by financial institution, but in many cases, HELOCs will have a “draw period” and a “repayment period.” The draw period is the time during which you can actively draw on (use) the funds. The repayment period is the time you have remaining after the draw period ends to pay off the entire debt.
Every financial institution is different, but in general, the amount you can obtain in a HELOC depends on your credit history, debt-to-income ratio, the value of your home, and how much you currently owe on it.
What are the Risks of a Home Equity Line of Credit?
HELOCs require your home to be used as collateral, meaning your home may be at risk if you are unable to make payments. Lenders are required to disclose the rate, repayment terms, fees, costs, and other terms of the loan, so make sure you read all of the disclosures carefully and you understand the loan terms before you to commit a HELOC. Review the Consumer Financial Protection Bureau’s (CFPB) document entitled “What you should know about home equity lines of credit.”
What are the Benefits?
There are many benefits to having a HELOC. Usually, it has a lower rate than other lines of credit or personal loans. Some common uses include: Emergency fund – While you should strive to have sufficient savings for unforeseen events, a HELOC secured during a time when the market value is good, is useful in creating an emergency fund.
Paying Off Debt
Student loans, credit cards, and other outstanding debts can be paid using a HELOC. Deciding if this is the right option for you depends upon the amount of debt and interest rates.
It’s a popular way to make home improvements, pay off debts, and prepare for emergencies. Having an open line of credit is like having a cash insurance policy. It’s a planning tool that prepares you for life’s twists and turns. Your home is one, if not the, largest asset you own. By conducting careful research, applying for a HELOC makes good sense. Your home equity is a great financial resource when it comes to planning for the future.
Information appearing in this article is obtained from sources we believe are reliable. The information may not be a complete statement of all available data and is not guaranteed as such. Marine FCU is not responsible for the contents of this article and advises its membership to investigate claims before following the information provided.