If you need to borrow money from your home, a home equity line of credit or HELOC is one way to accomplish this. Unlike a home equity loan, a HELOC allows you to tap those funds as you need it. Just keep in mind that you are using your home as collateral when using a HELOC — the loan needs to be paid back or you risk losing your home.
1. Consider your options. Quite easily, you could get your HELOC from the same lender that provides your mortgage loan. That’s an easy and convenient way to obtain funding. It might also prove to be a more expensive option, therefore it pays to shop around and compare rates. You are not required to get your HELOC from your main bank — any lender offering a deal and a great price should be considered.
2. Know your rate. Rates can vary, but if the rate comes in much lower than what the competition offers, then it may be an introductory rate. With an introductory rate, you’ll get the lower rate for a year or more, before the loan resets to the prevailing rate. Be careful here: the new rate may rise to a level that you cannot afford.
3. Your rate may be adjustable. With HELOCs, your interest rate may be adjustable. That lower rate lured you in, but if you’re concerned about the economy suddenly changing, then you could be left holding the bag if rates suddenly change. Check the loan agreement to determine if you can covert to a fixed-rate loan at any time. There may be a fee involved and the time to convert may be limited to the draw period, typically the first five to 10 years after the loan has been made.
4. Make a plan. What will you be using your HELOC funds for? It is important that you have a clear understanding on how those funds will be used, otherwise that money may be gone before you know it. For instance, if you borrow $25,000, then $10,000 might cover home improvement, and $5,000 each could go toward braces for your teenager, money toward your daughter’s college education, and the remaining funds to pay off a credit card. Know in advance where that money will be allocated and stick with it.
5. Pay back your loan or not. You should have a plan to pay back your loan and stick with it. However, if you envision selling your home within the next few years, then the loan can be paid off with the sale proceeds. Keep this in mind especially if you plan to buy another home as you will have less money to work with when formulating that transaction.
A home equity line of credit may seem like the best or easiest path for you. However, it may not be the most sensible or practical option. Depending on your age, withdrawing money from a retirement account may be a better option. Or, taking out a personal loan that isn’t secured by your home may be preferable. Do not seek to put your home on the line so quickly without considering your other options advises Credit Sesame.