Homeowners have a great source of funding available to them that others don’t: their house! If homeowners have a significant amount of equity in their home or especially if their mortgage is completely paid off, they can make great financial use of their house by taking out a home equity line of credit (HELOC).
HELOCs are loans in the form of revolving credit lines that are secured by a home. They work a lot like a credit card – you have a certain limit, you can draw out money as needed, and you only make payments after you have pulled out money from the account. Funds from a home equity line of credit can be used for anything. Borrowers commonly apply for HELOCs to pay for things like college tuition, weddings, home remodeling or renovation, starting businesses and consolidating other debts.
The Application Process
Applying for a HELOC starts with selecting a lender. Next comes filling out the paperwork; this can often be done online. You will then need to provide various documents like bank statements and tax returns from the past few years. Your lender will probably run a credit check. It can take up to a few weeks for your lender to go through all the documents and verify your income and ability to repay the loan as well as the current appraised value of your home. If you are approved, the process will continue similar to the one you went through with your mortgage.
The Terms and Interest Rate
The term length of a HELOC can vary widely from loan to loan. The draw period could last for as long as 10 years after which no more money could be pulled out and you would have another 10 or 20 years to repay the loan.
Interest rates on home equity lines of credit are typically adjustable, meaning they can change over the course of the loan. Borrowers should find out if their HELOC has an initial low “teaser” rate, how long it will last and how high their rate can rise.
The interest rate you receive on a HELOC will be determined by your credit worthiness and the amount of equity in your HELOC loan limit. Better credit and income will always help earn lower interest rates. The good news is that the interest rates on home equity lines of credit tend to be lower in general than those of credit cards or other revolving loans.
Using Your HELOC
Your lender will provide you with checks or a card that will allow you to pull out money as you desire. You can continue to pull out money until you reach your limit but you do not have to use the funds at all until you need them.
A Few Cautions
While a HELOC can help you finance any number of worthwhile projects, just keep in mind that because it is tied to your house, if you are unable to repay the home equity line of credit for any reason, the bank could foreclose on your home. Also know that the loan will be immediately due when you sell your home. So you will need to make enough profit on your sale to repay the HELOC fully or be prepared to make up the difference out-of-pocket.
If you keep these things in mind, a home equity line of credit can help you accomplish many of your financial goals.
If you have questions about a Home Equity Line of Credit - give Island Home Capital, Inc. a call today at 808-326-2444 to discuss if a HELOC is right for you.