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What is a Home Equity Line of Credit (HELOC)?

what-is-a-home-equity-line-of-credit-heloc
  • April 13, 2023

One of your most valuable assets you may own is your home - depending on the equity that you have built with it. Because of its value, many homeowners, like yourself, may want to explore different options to tap into the equity they have built into their home. Since equity is not liquid like cash, one of the most popular solutions is a Home Equity Line of Credit (HELOC). Let’s dive into this option.

What Is A HELOC

To get a better understanding of what a Home Equity Line of Credit is, its important to make sure you know what equity is. Put simply, equity is the difference between what your home is valued at and what you owe. For example, if you have a home that is valued at $250K and you owe $100K on it, then your home equity is $150K.

Once you understand this, you can begin to understand what is a home equity line of credit.

A HELOC is a type of second mortgage that allows you to borrow against the value of your home and make purchases on it as needed (and repay them) over a period of time.

How A Home Equity Line of Credit Works

In many ways, a HELOC works very similarly to a credit card, in the sense that it has a credit limit to which you can borrow and is a revolving line of credit. The more you use, the less you have. But, as you pay back on your loan, you gain the ability to borrow on that amount again.

On average, you can borrow between 65% to 85% of your home's equity.  So, if you had a home that was worth $250K and you owed $100K left on it, your home equity would be $150K. If you were able to borrow up to 85% on that amount, then your home equity line of credit would be $127,500. This, of course, is dependent on many factors, such as your lender and credit score.

Pros and Cons of a HELOC

On a surface level, this sounds like an amazing deal that anyone should jump on! But there are pros and cons to consider when using your home as collateral to get a Home Equity Line of Credit.

Pros of a HELOC

Lower Interest Rates

Because a HELOC in comparison to a personal line of credit it offers less risk to a lender than a traditional line t, the interest rates tend to be lower.

Consolidate Your Debts

Since a Home Equity Line of Credit can be used for anything such as closing costs and even vacations and weddings (like my family did), you can use it to consolidate your debts at a lower interest rate. 

Large Loan Amounts

Since a HELOC is a loan that is borrowed against the equity in your home, it allows you to take out a loan much larger than what most personal loans would allow you to do.

Cons of a HELOC

You Put Your Home At Risk

It’s important to note that the reason a lender has less risk on a HELOC is because you are taking on that risk. Should you fail to repay your HELOC, your lender will have the ability to foreclose on your home.

May Come With Uncomfortable Features

One of the most notable uncomfortable features of a HELOC is a balloon payment. The way this works is that if you were to pay off your HELOC, you would be required to make a lump sum payment on the remaining amount of your loan plus interest.

Monthly Payments May Change

Depending on how the market changes, your payments may change as well. This could mean your rates go up if the market changes for the worse or if you go past your draw period, you will be required to make full payments.

Alternatives to a HELOC

As you can see, there are many pros and cons to weigh when deciding whether or not to apply for a Home Equity Line of Credit. However, a HELOC is not the only option to consider when taking on a loan based on your Home Equity.

Home Equity Loan

While carrying some of the risk that a HELOC does by using your home as collateral, these carry the advantage of having set monthly payments with a fixed interest rate.

Cash Out Refinance

A cash out refinance lets you refinance your current home loan while borrowing cash for whatever you want. The new mortgage loan will be higher than what you currently owe on your home, and you will be able to cash out the remaining difference.

How Valor Mortgage Can Help

Making the right choice for you can come down to many factors - what’s important is that you speak with someone who can help you objectively look at all of your options. If you are looking to refinance your home in Tennessee or Kentucky, then get in touch with my team here at Valor Mortgage, and we’d be happy to help.

Refinance Home with Valor Mortgage

 

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