In life, there are situations where you may need a bit of extra money. This could be to make home renovations, to pay for emergencies, and a number of other things. While you could opt for a traditional loan, another option, if you own your home, is a home equity line of credit (HELOC).
These are very popular and for good reason. They give you affordable access to funds to ensure you always have peace of mind and no emergency will ruin your finances. But if you are unfamiliar with HELOCs, don’t worry, we’ve got you covered.
This article is going to go into detail about HELOCs and go over everything you could ever want to know about them.
What is a HELOC and How Do They Work?
A home equity line of credit is a revolving source of funds, similar to a credit card. You can borrow up to the limit whenever you want, and then simply pay it back to use it again. The amount you will have available to borrow will depend on the equity you have in the home. The more equity, the more you will be able to borrow, in most cases.
One of the best things about HELOCs is that they are not only easy to get, but also only require you to pay interest on the money you borrow. On the other hand, with a traditional loan, you pay interest on everything, even if you don’t use it all. The interest rates of HELOCs are generally favorable, as well.
It is also important to be aware of the fact that a HELOC has a draw period and repayment period. During the draw period, you can borrow and payback as much as you want, and are only technically responsible for making interest payments. But once the repayment period begins, you will have to start making regular payments to pay back the amounts you borrowed, plus continue paying the interest.
Of course, if you consistently pay off what you borrow in full during the draw period and have a zero balance once that period ends, the account will simply close as there is no need for repayment as you are already paid up.
What Should a HELOC be Used For?
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Now that you know a little about HELOCs and how they work, what should they be used for? While a HELOC can technically be used for everything, they are generally best used for things like home repairs, emergencies, or even to consolidate higher-interest debt you might have that is crippling your finances. It should generally not be used for things like buying a new TV, going on vacation, or making risky investments.
Because this loan is secured by your home, the last thing you want is to default on the loan, and you need to be careful with how you use it. While the foreclosure rate in the USA has been dropping, they do still take place. They can happen for various reasons, and defaulting on your HELOC or home equity loan could lead to you losing your home.
HELOC-Related Mistakes to Avoid
But in addition to spending the borrowed money irresponsibly on wants, there are other HELOC-related mistakes you should look to avoid. First of all, if you are experiencing issues paying your bills month after month, a HELOC isn’t a great tool.
This will eventually need to all be repaid and you are simply digging a deeper and deeper hole. Instead, find ways to reduce your monthly costs or find ways to increase the income you are receiving.
Some people will use a HELOC to invest in real estate, but this is generally a no-no as well, as real estate investing can be speculative, and getting your money out if you need it isn’t always easy.
If you can avoid these mistakes, a HELOC can be a brilliant tool to help with home renovations affordably or simply serve as an emergency fund to give you peace of mind.
In conclusion, we hope that this guide has been able to help you learn all there is to know about HELOCs.
