If you’re looking for a way to consolidate personal loan debt or want to free up some cash for a large purchase or home improvements, you may have come across the term HELOC. But what is it, what can it be used for and when is a HELOC a good idea?
- A HELOC is a line of credit backed by your home equity and can be a good idea when you're looking for a way to free up cash for home improvements.
- There are other options to consider, depending on your situation, and what you want to use the funds for.
- If a HELOC sounds like a good idea, consider a HELOC Card for a more efficient way to access your funds.
What is a HELOC?
A HELOC, or Home Equity Line of Credit, is a type of loan that uses your home equity as collateral. If you own at least 20% of your home, you may be able to use that equity to secure a HELOC. A HELOC works like a credit card in the sense that you can use the money when and where you need it. However, interest rates on HELOCs tend to be more competitive because the loan is backed by your home equity. In addition, rates are adjustable and move up or down based on a benchmark rate, such as the federal funds rate. During the initial draw period, which typically lasts five to 10 years, you can pay off your debt and borrow again as much as you’d like. You’ll only pay interest on the amount you withdraw. Then comes the repayment period, during which you pay down your debt by making monthly principal and interest payments.
What are the alternatives to a HELOC?
Before settling on a HELOC, you may want to consider other options. Depending on your situation, and what you want to use the funds for, another type of loan may suit your situation better. Let's take a look at some of the alternatives so that you can decide whether a HELOC is a good idea for you.
Home Equity Loan
A Home Equity Loan, also known as a Second Mortgage, is backed by your home equity, just like a HELOC. The main difference is that this loan is paid out as a lump sum, and once it’s taken out, that’s it. You can’t access additional funds, and when the debt is repaid, the loan is closed. The interest rate for this type of loan is typically fixed. A Home Equity loan can be used to consolidate high-interest debt or to fund home renovations when you have a plan and already know more or less how much you will spend.
Cash-Out Mortgage Refinance
A Cash-Out Mortgage Refinance may also be a good option if you're looking to make some home improvements. This type of loan replaces your existing mortgage with a loan for more money than you currently owe on your house, and the difference is paid out to you in cash. Your monthly mortgage payments will be higher as a result. Like the Home Equity Loan above, once you’re finished originating the loan, it’s done; you cannot draw additional funds like you would on a HELOC.
If you are older than 62, a Reverse Mortgage is another choice. As the name suggests, this type of loan works in the opposite way of a traditional mortgage: The lender makes payments to you in exchange for equity in your home, and your equity decreases as your debt increases. The loan balance doesn’t become due until you sell the property or pass away. This type of loan can be a good alternative when you want to retire but don't have enough savings and assets to do so. Scams are common, so do your research and be careful.
Another option to look into is a Personal Loan, which could be unsecured or secured against something valuable - like a car, for example. Personal Loans are often used to consolidate credit card debt or other high-interest debt, but keep in mind that the interest rates for personal loans can also be high compared with a HELOC.
Advantages of a HELOC
There are a few advantages of choosing a HELOC over the types of loans described above. First, the interest rates are usually lower than for other kinds of loans. Secondly, some lenders offer low or no closing cost and some may not charge fees for withdrawing cash. Finally, if you use your funds for home improvements or renovations, the interest on your HELOC may be tax-deductible.
When is a HELOC a Good Idea?
A HELOC may be the best choice if you are looking to use the funds for home improvements or renovations, which will increase the value of your home. It’s an especially good option if you’re unsure how much money you will need for the project because you’re able to withdraw funds as you go, while only paying interest on what you use. On the other hand, if you’re looking to free up cash for something like a car, which will not increase your wealth, another type of loan may be less risky. As discussed, a HELOC is backed by your home equity, which puts your home at risk should you not be able to pay back your debt.
What is a HELOC Card?
If you've determined a HELOC is a good idea for you, consider getting a HELOC Card. It can take weeks to receive approval for a traditional HELOC, while a HELOC Card takes as little as 15 minutes and allows you to skip the home appraisal process. Once approved, the card arrives in the mail in a few days. After a three-day waiting period, you'll be free to use the card anywhere credit cards are accepted. With a traditional HELOC, you will usually need to use a special checkbook or online transfers to access your funds.
Does a HELOC seem like a good idea? If you're looking for a HELOC Card, Aven can get you approved in as fast as 15 minutes. Find out more!