Looking for a way to secure a line of credit? Wondering if a home equity line of credit (HELOC) is a good idea?
We asked the Federal Trade Commission to help us understand more about a home equity line of credit.
We know: How a Home Equity Line of Credit (HELOC) Works
What is a home equity line of credit?
Itís a way to establish a line of credit by using the equity in your home as collateral. This line of credit is like having an instance advance. You usually use a check book or credit card to access the loan money when youíre ready to use it. Generally, you have access to the money over an extended period of time.
What are the advantages of a home equity line of credit?
Home equity lines of credit give you access to a large amount of money easily, and often at a fairly low interest rate. Usually, you can get a line of credit that is equal to 85% of the value of your home, minus what you still owe on your mortgage. Also, there are often tax advantages to borrowing money with a home equity line of credit.
What are the interest rates and costs of getting these lines of credit?
Home equity lines of credit have become popular recently, and there are lots of different ways to structure the loan agreement. Some loans (lines of credit) come with variable interest rates, some with fixed. Some also have balloon payments at the end of the loan period.
Some loans have upfront fees, some have closing costs, and some have continuing costs such as annual fees.
What about the time period over which I can have access to the line of credit?
Home equity lines of credit often have a fixed period of time over which you have access to the money. This is called the draw period. Under some agreements, you can renew your line of credit when the draw period ends. Under other arrangements, you canít.
How do I repay the money I borrow?
Again, there are a variety of ways. Sometimes you can replay the loan over a fixed period of time in payments with fixed or variable interest. With other line of credit loans, you have to repay the loan in full at a certain time. Still other loans require small payments in the beginning and a large payment at the end of the loan period.
If you know you have to pay off the balance you owe at the end of the loan period, ask the lender to agree ahead of time in writing to refinance anything you owe at the end, or to extend your repayment time.
Remember that if you sell your home, most line of credit loans require that you pay off the entire amount you owe on the loan at that time.
What are some of the disadvantages of a home equity line of credit?
Probably the biggest disadvantage of a home equity line of credit is that you put your house at risk if you default on repaying what you borrow.
Also, because you have such easy access to such a large amount of money, you may find yourself using the line of credit when you donít need it, or shouldnít use it.
And, like all loans, you have to pay the money back. So, unless you get very good terms on the amount of interest and fees and costs you pay, the loan can cost you a considerable amount of money in the end.