Every homeowner faces a tough situation from time to time. Whether it’s a medical emergency or finally completing a home renovation project, these large expenses can really put a dent in the household budget. One loan option to turn to is using the equity you have, with a home equity line of credit, or HELOC. Since there are other loan options available, you should review the pros and cons before proceeding with an application, and make sure to stop by Home Equity Wiz to further educate yourself with their library of resources.
What is a HELOC?
A home equity line of credit works in line with a traditional equity loan where you can take out a second mortgage with funds you have built up in equity, as the mortgage balance decreases and the home value increases (or even stays the same). This option works more like a credit card where you can borrow as-needed against your approved line amount, compared to paying back the full balance. Typically, lenders will allow maximum borrowing up to 80% loan-to-value (which is dividing what you owe vs. the value of your home), so with a lower loan amount than your first mortgage also comes with a fraction of the paperwork and closing costs as well.
Why this Might be the Right Answer for Your Situation
This loan option is attractive to those who need quick access to funds. If you are thinking about using to fund an upcoming wedding or a home renovation, here are the benefits you can expect:
- Streamlined Approval Process Compared to a Traditional Mortgage: If you have solid credit and income qualifications, not to mention equity built up in your home, you’ll find the process much less stressful compared to a typical mortgage process. Also, the more equity you have built up will help secure a more favorable loan payment.
- Competitive Interest Rate: While it may not be as low as your first mortgage, it typically will still be well under credit card interest rates.
- Pay for Only What You Borrow: Since it works like a credit card, you only have to pay back what you draw on, making it more flexible if you’re unsure exactly how much you need to the dollar amount.
- More Affordable than a Personal Loan: With interest rates being in the double digits for personal loans, you can find your payment to be half of what it would be otherwise, not to mention being able to repay in triple the allowable period.
- Lower Closing Costs: Since you’re not going through the traditional first mortgage, you can expect to only pay for an application and appraisal fee.
Reasons You May Want to Look into Other Options
Unfortunately, there are also disadvantages to proceeding with a HELOC that may ultimately help you decide whether or not to go with a traditional home equity loan or cash-out refinance:
- The Interest is Variable: Although the current rates are still near historical lows, there is still unpredictability when it comes to the monthly payments if rates were to suddenly rise.
- Long Repayment Terms: Many homeowners think that they benefit from the low monthly payments, however, repaying only this amount will take several years, up to fifteen, depending on your agreed terms, to pay off the balance. However, you can always put more towards principal each month to pay off sooner.