In many places, home values have grown considerably for recent years, providing homeowners an opportunity to tap into the equity of their homes to make renovations or otherwise boost their overall financial picture.
Although a home equity line of credit (HELOC) may be a good way to quickly access cash, it is important to proceed with caution and have good reason to do so. We’ll explain the ins-and-outs of a HELOC and some reasons why getting one could be the right move for you.
What is a HELOC?
A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on the value of your home. You can draw from a home equity line of credit and repay all or some of it monthly, similar to a credit card.
You borrow against your equity with a HELOC which is the value of the house minus the amount that you owe on the primary mortgage. Which means:
- You might lose your home to foreclosure if you don’t make the payments because you’re using your home as collateral.
- To get a HELOC you need to have plenty of equity. Typically, a HELOC allows you to borrow up to 85% of the value of the home subtracted by the amount you owe on the loans.
For something like a major repair or remodeling project that increases your home value, taking out a HELOC would be great. You should not get a HELOC if you’ll be putting yourself at risk of losing your home because you are unable to pay back what you are borrowing.
How Does it Work?
A HELOC works kind of like a credit card. You will borrow money up to a certain credit limit set by the lender and then pay it back, along with interest, the borrowed amounts. This option can offer more flexibility and you can even withdraw and make payments daily or weekly.
How Much Can You Borrow?
The credit limit for a HELOC depends on a number of factors, including your income and outstanding loans, but it is largely determined by the market value of your home and the amount you owe on your mortgage.
Say you have a $500,000 home on your first mortgage with a balance of $300,000 and your lender allows you to use up to 85% of your home’s equity. You may receive a HELOC with a limit of up to $125,000:
- $500,000 x 85% = $425,000.
- $425,000 – $300,000 = $125,000, your maximum line of credit limit.
What Would I Use a HELOC For?
A HELOC is commonly used for home repairs and upgrades. If you use the money to buy, build, or substantially improve your house, the interest on your HELOC may be tax-deductible.
Some people also use home equity lines of credit to pay for education. You should not use a HELOC to pay for vacations and vehicles because those expenses do not build wealth, and if you default on the loan, you run the risk of losing the home.
How to Get a Low-Interest Rate
You can automatically get a low-interest rate just by being a member of RMLEFCU! A good credit score can lower your interest rate even more. Order your free annual credit report from one of the three credit offices (Experian, TransUnion or Equifax) or check the RMLEFCU app to check your credit score. If you’re close to the cutoff lines between a good and excellent score, spend some time and raise your score before you apply for the HELOC.
When you’re ready to have a little extra cash, give RMLEFCU a call at 303-458-6660 or email firstname.lastname@example.org. We’ll get you the best rates.