Life is full of unexpected expenses from emergency home and vehicle repairs to hefty medical bills for unforeseen illness.
Whatever the cost, using a credit card may turn into a high-interest nightmare, and applying for a loan can get complicated and frustrating. That’s when a home equity line of credit (HELOC) comes in handy. You can take out a line of credit, based on how much equity you have in your home, and use and repay it multiple times.
Here’s what you need to know about a home equity line of credit.
It works like a credit card
A HELOC is different than a loan because you can use it like a credit card for one or multiple purchases, which you can then pay back. Then you can use the line of credit again, up to the limit you have set. You also pay interest only on the amount you use and nothing on the unused portion.
The advantage of using a home equity line of credit over a credit card is that it typically has a lower interest rate than a credit card. It also offers more flexibility when you need cash as getting a cash advance through a HELOC is associated with minimal to nonexistent fees.
“Lines of credit typically let you take a cash advance on 100 percent of the total amount you’re eligible to borrow,” according to Fundera. “Credit cards, on the other hand, are generally far more restrictive, often capping cash advances at about 20 percent.”
Unlike a credit card, a line of credit usually remains open for a set time, usually 10 years, after which you need to reapply if you want to keep using it.
You can use it for anything — but shouldn’t
A home equity line of credit is great when you need it, but be careful not to abuse having readily available cash, because you could quickly accrue debt.
“Most often, homeowners use HELOCs to pay for home repairs and renovations,” according to Bankrate. “But people use HELOCs to pay for college, buy cars, pay off credit cards, make down payments on vacation homes, and myriad other reasons, wise and unwise.”
When you aren’t using the money to splurge, debt.org points out situations where a home equity line of credit is a lifesaver:
- Projects with funding challenges, such as having to pay for a wedding and a new roof at the same time.
- People with irregular incomes, who are self-employed or work on commission and need to pay bills before their next paycheck.
- Emergency situations, such as when a tax bill and college tuition are due at the same time.
- Overdraft protection, if you write a lot of checks.
- Business opportunity, including buying a business or creating growth through marketing opportunities.
The interest rate changes
A home equity line of credit has a variable interest rate, which works for and against you. If the interest rate is low, you benefit by having a lower payment, but a high interest rate means a higher payment. There is also a hybrid line of credit option that lets you lock a fixed rate on a portion of the money you need.
“A HELOC with a fixed-rate option has appeal to homeowners embarking on renovation projects,” according to Investopedia. “By locking the renovation money at a fixed rate, they don't have to worry about rising interest rates.”
A lender can help to determine the maximum rate you’ll pay, based on the prime rate and your credit profile. If the payments are a reasonable amount, then you can move forward.
Every person’s financial situation is unique, so ask an expert for help understanding how a home equity line of credit might work for you. The professionals at FAB&T can answer your questions and guide you through the process. You can even start your application online and get a personalized quote at fabandt.com.