What Are the Benefits of a HELOC?
If you're a homeowner looking for flexible financing options, a Home Equity Line of Credit (HELOC) might just be what you need.
With a HELOC, you can draw on the equity you've built up in your home to take advantage of a revolving line of credit.
Let's explore the various HELOC benefits, how a HELOC works, when it's a good idea, and how you can apply for one today.
Thinking a HELOC might be right for you? Start your journey now with our Digital Mortgage Application, and let’s see how much of your home’s value you can unlock.
Benefits of a Home Equity Line of Credit
A HELOC has special benefits that make it a flexible choice for accessing your home’s equity. If you’re approved for a HELOC from Rate, you can get funding in as little as 10 days!
Here are a few reasons why homeowners enjoy using a HELOC:
What are the advantages of a HELOC?
1. Access to Cash When You Need It
One of the most significant HELOC advantages is the access to cash it provides. You can access a larger loan with interest rates that are usually lower than most credit cards.
You can borrow up to a certain limit and only pay interest on the amount you borrow. This makes it ideal for ongoing projects like home renovations, paying for college tuition, or covering unexpected expenses.
The flexibility to withdraw funds and pay them back over time, with a lower interest rate than other funding methods like credit cards, is a key benefit of a HELOC.
2. Lower Interest Rates
Compared to credit cards or personal loans, HELOCs generally offer lower interest rates. Since your home serves as collateral, lenders are willing to offer better rates than they would for unsecured loans. This can make a HELOC a cost-effective way to finance large expenses. In addition to that, you only pay interest on the amount you borrow, not the entire credit line, which helps keep costs down.
3. Flexible Repayment Options
During the draw period, the initial phase of a HELOC that typically lasts 10 to 15 years, you can borrow funds up to your approved credit limit. During this time, you might only need to make interest payments, which can help keep your monthly payments low when your budget is tight.
After the draw period, you enter the repayment phase, where you start paying back both principal and interest. This flexibility in repayment can be particularly useful if your income varies from month to month.
4. Potential Tax Benefits
While tax laws can be complex and are different based on your situation, depending on how you use your HELOC funds, you may have potential tax saving benefits. With that said, it's important to talk with a tax professional to understand how this could apply to you.
5. No Restrictions on Use
You can use the funds from a HELOC for virtually anything.
While many homeowners use them for home-related expenses, you could also use a HELOC for things like consolidating high-interest debt, financing a wedding, or even taking a vacation. The freedom to use the money as you see fit is another reason why HELOCs are popular.
When is a HELOC a Good Idea?
There are many benefits of a HELOC, but it’s not always the right solution for everyone or every financial challenge.
Here are some situations where a HELOC might be a good idea:
Home Improvement Projects
Using a HELOC to fund home improvements can be a smart move, especially if the renovations increase your home’s value.
For instance, adding a new bathroom or upgrading your kitchen can boost the market value of your property, potentially leading to a higher return on investment when you sell your home.
Debt Consolidation
If you have high-interest debt, such as credit card balances, a HELOC can provide a lower interest rate. This allows you to consolidate your debts and can help you pay your debt off more quickly.
By replacing higher-interest debt with a HELOC, you can reduce your monthly payments and save money on interest over time.
It’s important to remember that you’ll need to manage this carefully, as your home is on the line if you fail to make payments.
Emergency Fund
A HELOC can serve as a financial safety net in case of emergencies.
Whether it's unexpected medical bills, urgent home repairs, or other unforeseen expenses, having access to a HELOC ensures that you have a flexible and readily available source of funds.
This can provide peace of mind, knowing you have a financial cushion without having to resort to high-interest loans or credit cards in a crisis.
Tuition Costs
Paying for education is another common use for HELOCs, especially since the interest rates are often lower than those on student loans.
Whether it’s for your child’s college tuition or your own continuing education, a HELOC can spread out the cost over time, making it more manageable.
Plus, if the education enhances your earning potential, it could be a worthwhile investment in your future.
HELOC Pros & Cons
While a HELOC offers flexibility and access to funds, it also comes with certain risks. Below, we’ll explore some of the key HELOC pros and cons to help you determine if a HELOC is the right option for your financial goals.
Pros:
Control Over Borrowing and Spending
Unlike traditional loans, where you're given a lump sum, a HELOC offers you the flexibility to borrow only what you need when you need it. This allows for better control over your finances and ensures that you're not borrowing (and paying interest on) more than necessary.
Interest Savings Potential
HELOCs usually have lower interest rates than credit cards since they're secured by your home. Plus, you only pay interest on the amount you borrow which can lead to significant savings overtime.
Adjustable Payment Options
A HELOC offers more flexibility in how you repay the loan. This flexibility is particularly beneficial for homeowners who may have fluctuating incomes or need to manage cash flow during specific periods.
Cons:
Rising Interest Rates
While HELOCs may start with low interest rates, many come with variable rates that can increase over time. If the market rate rises, so will your interest rate and monthly payments, which could become a financial burden.
If you're someone who prefers stability and predictable payments, a variable-rate HELOC could introduce uncertainty into your budget.
Potential Overborrowing
The flexibility of a HELOC can sometimes lead to overborrowing. Since funds are readily accessible, there’s a temptation to treat it like free money and draw more than you truly need.
However, borrowing beyond your repayment ability can put your home at risk because the loan is secured by your property.
Risk to Your Home
With a HELOC, your home acts as collateral. If you miss payments or are unable to repay the loan, you risk foreclosure, which can result in the loss of your home. This risk is something to seriously consider, especially if you're consolidating unsecured debts like credit cards into a HELOC.
How Does a HELOC Work?
Unlike a home equity loan, a HELOC is divided into two phases: the draw period and the repayment period. During the draw period, you can borrow funds as needed, typically up to 85% of your home’s value minus the outstanding mortgage balance.
You’re only required to make interest payments during this time, though you can also pay down the principal if you wish.
After the draw period ends, the repayment period begins. During this time, you’ll need to start paying both principal and interest, often over 10 to 20 years.
Some HELOCs require a balloon payment at the end of the draw period, so it’s crucial to understand the terms before you commit.
How Can I Apply for a HELOC Today?
Here's what you should do to apply for a HELOC:
Check Your Home’s Equity: First things first, figure out how much equity you've got in your home. Most lenders want you to have at least 15% to 20% equity before they’ll even consider your application. You might need to get your home appraised to get an accurate number. This isn’t just about eligibility; it also determines how much you can actually borrow.
Review Your Credit Score: Your credit score is key here. If your score’s a bit lower, don’t sweat it too much, you can work on it by paying down some debts or fixing any errors on your credit report. The better your score, the lower your interest rate, which can save you big bucks over time.*
Evaluate Your Debt-to-Income Ratio (DTI): Your DTI shows how much of your monthly income goes toward paying off debt. Lenders usually want this number to be under 43%, but lower is always better. If your DTI is high, you might want to pay down some debt before applying to increase your chances of getting approved.
Gather Necessary Documentation: Now, gather up all the paperwork you’ll need. This includes proof of income, tax returns, recent mortgage statements, and anything else your lender asks for. Having everything ready to go can speed things up and make the process smoother.
Shop Around for Lenders: Don’t just go with the first lender you find, shop around! Different lenders offer different rates, terms, and fees. It’s worth comparing several options to find the right deal for you. And remember, the lowest interest rate isn’t always the most suitable deal if there are hidden fees attached.
Get an Appraisal: Most lenders will require an appraisal to find out how much your home is worth today. A good appraisal can increase your borrowing power, so it might be worth making small improvements before the appraiser comes over.
Complete Rate’s HELOC Application Process: Once you’ve picked a lender, it’s time to fill out the application. Make sure you’ve got all your documents ready. After you submit everything, you’ll go through a closing process similar to getting a mortgage. With our Digital Mortgage Application process you can get funding in as little as 5 days**. Next, review all the terms carefully to make sure you fully understand what you’re signing up for.
A HELOC offers many benefits, one being flexible access to funds, making it a versatile financial tool for homeowners.
Whether you’re looking to make home improvements, consolidate debt, or cover unexpected expenses, a HELOC from Rate could be the right solution.
Just be sure to assess your financial situation carefully, shop around for the most fitting terms, and use the funds wisely to maximize the benefits.
HELOC Benefits FAQs
1. What happens if I can't make my HELOC payments?
If you’re unable to make your HELOC payments, your lender could potentially foreclose on your home, as your property is the collateral for the loan.
Missing payments can also significantly damage your credit score, making it more difficult to obtain loans in the future.
So, before taking out a HELOC, you need to have a solid plan for repayment and an emergency fund to cover unexpected financial difficulties.
2. Can I still get a HELOC if I have a mortgage?
Yes, you can obtain a HELOC even if you have an existing mortgage. The HELOC will act as a second lien on your home, meaning the original mortgage remains in place.
Lenders will typically evaluate the total amount of debt against the home’s value to determine your eligibility and how much you can borrow.
With that in mind,it’s important to note that your combined loan-to-value (CLTV) ratio should be within the lender's limits, typically not exceeding 85%.
3. How does a variable interest rate on a HELOC affect me?
A variable interest rate on a HELOC means that your interest rate—and therefore your monthly payments—can fluctuate over time based on market conditions. Rate, on the other hand, offers competitive HELOCs at a competitive fixed rate. This rate consistency can help payments remain manageable throughout the HELOC loan terms.
While you might benefit from lower rates initially with a variable rate HELOC, there’s a risk that rates could increase, raising your payments.
It’s important to budget for potential rate increases, and consider locking in a fixed rate if your lender offers that option, especially if you anticipate rising interest rates in the future.
* Rate is not a credit repair or credit counselling agency. Talk to a qualified financial advisor or other licensed credit professional about any questions you may have.
**Applications may be completed in five minutes but may fluctuate. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and may need to order a desktop appraisal to confirm the value of your property. Texas borrowers will have a 12-day cooling period prior to closing on their home equity loan which will begin after the borrower has both filed a loan application and received consumer disclosures