A home equity line of credit – or HELOC, the acronym commonly heard – is one of the best kept secrets if you are a homeowner. A HELOC allows you to borrow money from the equity you have in your home. Typically the less you owe on your home mortgage, the more value you have in your home, and therefore, the more you can borrow.
A HELOC is a second mortgage on your home. But don’t let this scare you. Granted, if you don’t pay either mortgage – your primary mortgage or your secondary mortgage (HELOC), you could lose your home in a foreclosure. But, let’s assume you have the means to pay your bills and this is not a concern.
A HELOC uses the equity you have built up in your home as collateral. It does not replace the first or primary mortgage. Instead, it takes a second position – hence a second mortgage. Generally, you can only borrow up to 75 to 80% of the loan-to-value ratio in your home. This means that if your first mortgage is at 80 percent of the home value you may not qualify.
If you have ever used a credit card, you understand how you can borrow money and pay it back monthly, with interest. The same holds true for a HELOC, however; because a HELOC is secured to your home, i.e., used as collateral, it will typically come with a lower interest rate. When comparing an unsecured line of credit like a credit card, a HELOC is a much better option for many larger household expenditures.
Flexibility is also a great benefit of a HELOC. Once you are approved for a certain amount, you determine how much you want to access – it becomes your personal line of credit. This loan allows you to borrow only the money you need. Again, HELOCs usually have more competitive rates, again because your home is your collateral, so your payments will vary depending on your interest rate and the outstanding balance of your line of credit.
Now the fun part – deciding how you can use your HELOC. Most people use their HELOC for remodeling projects, home repairs, tuition, medical bills and debt consolidation, like consolidating credit card debt. Some use a HELOC for the vacation they have always wanted. It’s also used for an emergency fund, which can bring great peace of mind to a homeowner.
A HELOC is most popular for remodeling projects because the final cost may be unclear, and the expenses can happen gradually instead of all at once. You can access your line of credit as you need it.
If you’re a homeowner, you definitely want to consider a HELOC. If you are like many consumers, you may not understand all the advantages of this loan. It is a second mortgage, so it can be frightening and confusing. But it is one of the best kept secrets of a homeowner – to have an automatic loan to use whenever you need it – like emergency situations, large purchases and remodeling.
For more information on a HELOC please call Chelsea State Bank at 734.475.4210 or visit us at https://www.chelseastate.bank/landing/home-equity-loans/ to begin. We are here to help you learn more about this loan and any of the other loans we offer.
Loans are subject to credit review and approval.