What is a HELOC?Sep 24, 2022 09:36PM ● By Rebecca Young
A home equity line of credit (HELOC) is a line of credit that allows you to tap into your home’s equity.
How it Works
Like a credit card, a HELOC is a revolving line of credit that allows you to borrow up to a certain limit. The amount of money a bank or credit union will allow you to borrow on your HELOC will depend on what they set as their max acceptable LTV (loan to value). The LTV is the ratio of how much you owe on your home versus how much it’s worth.
HELOC vs. Credit Card
While it’s similar to a credit card, a HELOC works slightly differently. One difference is HELOCs have a time limit. First, there’s the draw period. This is generally a 10-year period where you can withdraw and use the funds available in a HELOC. You’ll often still need to make payments during this phase, and the payments will go toward interest owed with the remainder toward the principal balance, which will reduce the amount you owe.
Second, is the repayment period. Once you reach this period, you’ll no longer be able to borrow money and will start repaying the principal and the interest you’ve accumulated. The repayment period generally lasts five to 10 years. If you decide to move or you’ve paid everything back, the outstanding balance will be due before you close.
Qualifying for a HELOC
To qualify, you’ll need to prove to your potential lender that you will be able to pay back any money you borrow. Your lender will consider your debt-to-income ratio, your credit score and more. The lender you choose for your HELOC does not have to be the same as your mortgage provider.
Taking the Risk
Before jumping headfirst into a HELOC, it’s important to be aware of the risks associated with it. First and foremost, a HELOC requires you to put your home up as collateral in exchange for the credit line. This means that if your situation changes drastically and you’re suddenly unable to make your payments, you risk losing your home. You also reduce your equity in your home when you use a HELOC, as you are increasing the debt that you owe against it.
Plus, a HELOC isn’t free money. There are fees associated with opening and maintaining it. Similarly, HELOCs have variable credit rates. This means the interest rate will change with market factors. You may be able to start out with a low rate at the beginning, but your payment could become much less affordable. However, while it is not very common of other financial institutions, Alive Credit Union, which has seven locations in the greater Jacksonville area, does offer a fixed-rate HELOC.
There’s also the risk of overborrowing when it comes to a HELOC. With such a high limit, it can be easy to slip into using more than you can afford to pay back and getting yourself into unnecessary debt.Is a HELOC Right for You?
Deciding if a HELOC is right for your situation will mean considering all of your debt, your risk tolerance, and what you want to use the credit line for. One of the most common uses for a HELOC is to renovate or improve your home. Interest on HELOC payments used for these purposes can be tax deductible and may have a lower interest rate than a credit card or other loan options, though the lower rate is not guaranteed to stay.
If you need extra funds and are comfortable with the idea of borrowing against the equity of your home, another option could be a home equity loan. This loan works similarly to a HELOC but, rather than being a reusable credit line, is a lump sum that you borrow and pay back.
For more than 68 years, Alive Credit Union (ACU) has been committed to serving their community in health care and in select organizations, including Southeastern Grocers and anyone who works in real estate. ACU has set their focus on providing the highest level of member service and to also inspire financial wellness through financial education. That is why they have five certified credit union financial counselors on staff to assist members through hurdles. As a valued member, a person has access to a variety of resources, including credit report review, explanation and analysis; debt elimination counseling; budget assistance; and future financial goal planning. For more information, call 904-296-1292 or visit Alivecu.coop.