If you have owned your home for a while, you may have built up a meaningful amount of equity, which is the difference between what your home is worth and what you still owe. A home equity line of credit, or HELOC, is one way to put that value to work without selling or replacing your current mortgage. Here is how it works and what to consider before you apply.
A HELOC is a revolving line of credit secured by your home. Instead of receiving one lump sum, you are approved for a maximum amount and can borrow from it as needed, repay it and borrow again during a set time frame. In that way, it works more like a credit card than a traditional loan, but usually at a lower interest rate because your home secures it.
How much you can access depends on your home’s value, your current mortgage balance, your credit and your income. Lenders generally limit the combined total of your mortgage and HELOC to a percentage of your home’s value.
This is the window, often several years long, when you can borrow from the line. During this time, many HELOCs require only interest payments on the amount you have used, although you can typically pay down principal too. You can usually access funds through online transfers, checks or a card.
Once the draw period ends, you can no longer borrow, and you begin repaying both principal and interest over a set term. Payments often rise at this point, so it is important to plan for that change from the start.
Most HELOCs have variable rates, which means your rate and payment can change over time with the market. Some lenders offer the option to lock a fixed rate on part of your balance. Ask about any fees, such as appraisal, annual or early closure fees, so you understand the full cost.
If you use the money to buy, build or substantially improve your home, the interest may be tax-deductible in some cases. Check with a tax advisor about your situation.
A HELOC can be a helpful tool, but your home is the collateral. If you cannot make payments, you could put your home at risk. Before borrowing, consider:
Borrow only what you need for a specific purpose, and pay more than the minimum during the draw period when you can. Keep an eye on your rate and balance, and avoid treating the line like spending money.
A HELOC lets you keep your existing first mortgage, which can be appealing if you like your current rate. A cash-out refinance replaces your mortgage with a new, larger loan and gives you a lump sum. The right choice depends on how much you need, how you will use it and your current loan terms.
If you are thinking about tapping your equity, learn more about our HELOC options and contact FLO Mortgage. A loan officer can help you compare choices and find the approach that fits your goals.
A FLO Mortgage loan officer can walk through your options, run real numbers and help you choose a loan that fits.
This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.
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