Everything You Should Know about a HELOC

Written by Ashley Sutphin Posted On Friday, 29 July 2022 00:00

During 2020, a lot of people decided to make a change in their lifestyle. The coronavirus pandemic led to shutdowns across the country and the world. For people in big cities, that presented a set of challenges. With limited space and access to the things that are so appealing about city living, many people opted to move to suburban areas.

There were bidding wars, and prices soared during 2020, and now a lot of those buyers are looking at ways they can renovate the homes they bought as we head into a new year.  

Even if you’ve been in your home for a long time, you may still be eyeing a remodel in 2021 to make it more in line with your dream house, especially if you’re spending a lot more time there.

Options for financing a remodel can include loans, and for some people borrowing against the equity they have in their home may make sense.

A home equity line of credit or HELOC is one option that offers more flexibility than a traditional loan but simultaneously lets you borrow against your home’s equity.

How Does a HELOC Work?

With a HELOC, you borrow against your home’s equity, but there’s flexibility in how you use and pay back the money. It’s like a credit card in many ways.

You apply for financing and then you get a credit limit set by the lender. You can borrow up to that amount, and then you pay back what you borrow with interest.

You can both withdraw and make payments daily or weekly if that’s what works for you.

If you’re approved for a HELOC, you may be able to withdraw money during what’s known as the draw period. When your draw period ends, your lender may decide to renew your credit line. If not, you pay the amount outstanding either all at one time or over a repayment period.

The length of HELOCs ranges, and they can go up to 30 years. They’re typically built on a long-term relationship with the lender.

How Much Can You Borrow?

The credit limit offered with a HELOC depends on your credit and your outstanding debts and the market value of your home, and what’s owed on your mortgage. If you are a recent buyer and you want to start a remodel, you might not have a lot of equity in your home.

The amount you can borrow with a HELOC is usually limited to no more than 85% of your home’s appraised value minus what’s owed on your mortgage.

Fees that come with a HELOC can include title search, appraisal, application, and attorney fees. The lender sets the fees, so you need to read the fine print.

What Are the Downsides?

A HELOC can sound like a great option. You borrow only what you need, and the flexibility works well for home renovation and repair costs because these can be uncertain.

With that being said, there are downsides.

One of the biggest risks is that if you can’t make your payments, you could lose your home.

Banks try to protect against this by putting limits on how much you can borrow, but it’s still something to consider.

Your lender may also be able to freeze your credit line, which is usually done because of missed payments or changes in your home’s equity, but it’s a downside you do have to think about.

Finally, the interest rate on a HELOC may be variable, so the market can impact how much you pay.

A HELOC can be a good option if you don’t have the cash set aside for a renovation or repair, but there are other choices as well. The right fit will depend on individual factors including the scope of the project and how much equity you have in your home.

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