If you own a home with no debt, and are planning to take a holiday vacation, make large seasonal purchases or want to consolidate your debt after the holidays, you might want to set up a Home Equity Line of Credit (HELOC) as an alternative to using credit cards.
HOW DOES A HELOC WORK?
If you own a home and have good credit, you may be eligible to take out a line of credit on your home. The first 10 years on a HELOC loan are a drawing period, where you can write checks to make purchases and then make low, monthly interest-only payments. (Principal payments are accepted at any time as well.) After 10 years, your HELOC will turn into a 10-year loan where you will make monthly principal and interest payments to pay off the balance.
HELOC IS NOT JUST FOR HOME IMPROVEMENTS
A HELOC is typically a first or second mortgage product, and many people take advantage of it for home improvements such as finishing off a basement, but this special line of credit can be used in more creative ways. One advantage of a HELOC, is that it typically has a lower interest rate than a credit card, because your home serves as collateral for the loan. The interest rate will fluctuate with the market prime rate. Once you are approved for a HELOC, you will be issued a checkbook and can write checks, or go to the bank and pull out cash. Typically, people use the money to make other purchases such as a buy a car, to remodel a home or to take a family vacation. Others have used HELOCs to take advantage of good investment opportunities as they arise.
WHO CAN GET A HELOC?
Anyone who owns a home and has a minimum credit score of 640 may be able to qualify for a HELOC. Those with a higher credit score may qualify for a higher loan-to-value (a line of credit of up to 90 percent of the value of their home).
HYPOTHETICAL EXAMPLE OF HOW A HELOC LOAN IS CALCULATED
- Home’s appraised value: $300,000
- 90% of appraised value: $300,000 x 0.9 = $270,000
- Amount owed on the home mortgage: $150,000
- 90% of home’s value minus amount owed on mortgage: $120,000
- This borrower may qualify for a line amount of up to $120,000
WHAT ARE THE BENEFITS?
Bank of Utah does not charge fees for HELOCs (yay!), so you can get one and never use it and not pay anything! Why would you do that? A HELOC can serve as a rainy-day fund or as ready cash if an investment pops up. Your HELOC loan is considered to be a mortgage, so ask your tax advisor if your HELOC interest qualifies for a tax deduction.
TAKE ADVANTAGE OF THE RISING VALUE OF YOUR HOME
Utah home values continue to increase, so you might want to take advantage your own higher home value by accessing that equity through a HELOC. One way to take advantage of your home’s higher equity is to do a cash it out refinance of your mortgage. This may be the best option, but if you aren’t sure if you need all of the cash or your first mortgage interest rate is really low, a HELOC may be a better option.
A HELOC loan may be a good strategy for your long-term financial goals, however, keep in mind that both the market value of your home and interest rates fluctuate over time, so consider using it for the short term and plan to pay it back quickly, like all loans.