There are plenty of loans out there, but few are as popular as a home equity line of credit, also known as a HELOC. This loan is a great option for many borrowers due to its flexibility and lower rates. However, as with most things in the financial world, it’s important to do some research first before applying for anything. Lucky for you, our expert financial team here at RMLEFCU knows the ins and outs of HELOCs – including its advantages and disadvantages.
Here’s a breakdown of what you need to know before applying for one.
How HELOCs Work
A HELOC is a loan that uses the equity in your home as collateral. Most HELOCs have a “draw period” during which you can borrow against the equity in your home, up to the maximum amount that you are approved for. Once the draw period ends, you will enter the “repayment period,” during which you will need to repay the loan.
HELOCs work by giving you access to a line of credit that you can use as needed. You can use the money from a HELOC for any purpose, including home improvements, debt consolidation, or major purchases. As you repay the loan, the funds become available again so that you can borrow against them if needed.
Did You Know?
When our members apply for a HELOC, they’re entitled to the following:
Low Payments: Starting at $100 per $10,000 drawn
Interest-Only Option: This lowers their payments even more
Low Interest Rates: Currently starting at 6.25%* APR
Advantages of HELOCs
One of the primary benefits of a HELOC is that they usually have lower interest rates than other types of loans. This is because lenders view them as being less risky than other loans since they are secured by your home equity. Additionally, most lenders, like RMLEFCU, allow you to make interest-only payments during the draw period, which can help keep your monthly payments more manageable.
Another benefit of HELOCs is that they offer flexibility in how you use them. Unlike a traditional home equity loan, which provides a lump sum of cash that must be repaid over time, a HELOC allows you to borrow only as much money as you need when you need it. This can be helpful if you aren’t sure how much money you will need upfront or if your needs change over time.
Drawbacks of HELOCs
While HELOCs do have a ton of advantages, there are also some potential drawbacks to consider. One potential drawback is that your interest rate may increase during the repayment period. This means that your monthly payments could go up while your income stays the same.
Another potential disadvantage lies in untimely payments on your loan. If you don’t make your payments on time, you could risk losing your home through foreclosure. Both of these potential disadvantages can be avoided by doing a thorough evaluation of your financial situation before making the jump and applying for one. We strongly recommend speaking with one of our Certified Financial Counselors if you’re worried about either of these disadvantages coming to fruition.
Who Should Use a HELOC?
People with good credit: One of the biggest benefits of a HELOC is that it generally has a lower interest rate compared to other kinds of loans since it’s secured by your home equity. For this reason, lenders see HELOCs as being low-risk loans—thus, they’re more likely to offer better terms to borrowers with good credit. If you have good credit, a HELOC can be an excellent way to get access to low-cost financing.
Homeowners with equity in their homes: To qualify for a HELOC, you must have equity in your home. Equity is the portion of your home’s value that you own outright; it’s calculated by subtracting the amount of your outstanding mortgage balance from your home’s appraised value. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. If you’re thinking about taking out a HELOC, make sure you have enough equity built up in your home first.
People who need access to a sum of money as needed: A HELOC can be a great way to get access to cash when you need it. Unlike a traditional loan, which gives you a lump sum all at once, a HELOC provides you with a line of credit that you can draw on as needed. This can be helpful if you need money for an unexpected expense or want to consolidate high-interest debt into one lower-rate loan. You only pay interest on the portion of the line of credit that you use, so it is often more cost-effective than taking out a traditional loan.
Is a HELOC Right for You?
A HELOC can be a great financial tool for members who have good credit and have equity in their homes. At RMLEFCU, our Certified Financial Counselors are here to help match you with the best possible financial solutions possible to strengthen your current and future financial health.
If you’re curious as to whether a HELOC is the right choice for you, our representatives are available to help. Stop by any of our branches or give us a call at (303) 458-6660 to learn more today.