Curious about taking out a HELOC loan but unsure of how the process works? You can access some of the equity in your home using these loans, but it is best to understand how these loans operate, how you would use the cash provided, and how the loan should be paid off. Take a look at the information listed below in this PDS blog to learn how to apply for and manage a HELOC if it is right for you.
What is a HELOC Loan?
A HELOC loan is better known as a home equity line of credit. As the name suggests, you are taking out a line of credit that you may access at any time through the mortgage lender you have chosen. The amount of the loan is determined based on the equity you have in your home—the difference between how much your home is worth and how much you owe. So, if you own a home that is worth $300,000 and you owe $150,000, you have $150,000 in equity in the home.
However, the line of credit is not the same as a credit card.
A credit card allows you to buy and pay as you go, offering purchasing power in perpetuity. A home equity line of credit offers a draw period and a repayment period. You will qualify for a HELOC based on how much equity you have in your home, you can use that money for anything you need, and you will repay the loan in a predetermined amount of time.
How Does a HELOC Work?
When you apply for and are approved for a HELOC, you are given a lump sum figure that you will draw from. The lender will give you a “draw period” from which you may debit money from this loan as much as you need, up to the limit of the loan. Once the draw period is over, you will enter the “repayment period”. The repayment period is where you are only paying off the money you used. Similar to a credit card, you are not expected to pay on the credit limit—-only your purchases.
For example, you may be approved for a $50,000 loan. However, you may only use $25,000. When the repayment period begins, you are expected to pay back the $25,000 you used at the interest rate listed in your closing documents. Plus, you will need to pay off the loan in the length of time stated in those documents.
A common HELOC repayment period is generally 10 to 20 years.
How to Get a Home Equity Line of Credit
How does a home equity line of credit work? It works by providing you with the cash you need instead of taking a credit card or applying for a personal loan. Plus, you get a home equity line of credit from a mortgage lender, not a traditional bank.
Most homeowners will get a HELOC from the lender that set up the mortgage on their house. However, there are specialty lenders who provide home equity loans instead of mortgages. Plus, you are free to apply for another HELOC in the future, if it is needed. This is a financial tool that can offer you quite a bit of financial flexibility.
When Should You Use a Home Equity Line of Credit?
When you get a home equity line of credit, you can use it for any number of things, including:
- Emergency repairs or expenses
- Student tuition
- Home upgrades
Of course, you can use a home equity line of credit for anything you like. However, you should check HELOC rates and determine if they are competitive compared to other loan options you have.
How to Apply for a HELOC
You can get a HELOC today and improve your financial outlook. Reach out to your mortgage lender or compare rates of other lenders that serve your area so that you can access the equity in your home as soon as possible.
Curious on learning more about your loan options? Contact PDS and take our free debt assessment today!
