The housing market may be cooling down, but homeowners still have record-breaking home equity. The average mortgage holder has $300,000 in home equity, making a home equity line of credit, or HELOC, one of the best options for low-cost financing on the market.
What is a home equity line of credit (HELOC)?
A home equity line of credit (HELOC) is a type of second mortgage that lets you borrow against your home’s equity, allowing you to keep the low interest rate on your primary mortgage while turning that home value into cold, hard cash.
A HELOC is a revolving line of credit, much like a credit card, that you can access as you choose. You can spend as much or as little as you want, up to the credit limit, and you’ll only pay interest on the amount you spend. This makes it different from an installment loan, such as a home equity loan or personal loan, where you receive the full loan amount in a lump sum upfront.
For example, if you have a $100,000 HELOC, you can borrow up to that amount. If you only use $25,000 of the line of credit, you will only pay interest on that $25,000, not the $100,000 maximum.
How does HELOC repayment work?
With home equity lines of credit, the loan is divided into two phases: the draw period and the repayment period. The draw period of a HELOC works like an open line of credit, allowing you to borrow from, pay back, and reborrow as needed. During the draw period, which tends to be between five and ten years, most lenders require you to make interest-only payments on the amount you borrow. But you can also pay down some or all the principal amount if you choose.
After the draw period ends, the loan enters the repayment period. In the repayment period, you will no longer have access to the HELOC funds and will have to start making full monthly payments that cover both principal and interest. The length of the repayment period varies; however, it’s usually longer than the draw period, lasting between ten and twenty years.
What can you use a HELOC for?
HELOCs are designed to be a flexible way to leverage the equity in your home. While a home equity line of credit is a powerful tool for funding large expenses, you can use the funds from your HELOC for any purpose.
Homeowners often use HELOCs to finance major renovation projects as the interest rates are lower than they are on personal loans and credit cards. And if you use the funds for renovations that “substantially improve” the home, called capital improvements, the interest is tax-deductible.
Another common use of HELOC funds is high-interest debt consolidation. With the average credit card interest rate being 21.59%, you could save thousands in interest payments after using home equity to consolidate multiple debt obligations into one lower, monthly payment.
Whether you’re looking to fund home improvements, debt consolidation, college tuition, investments, or emergency expenses, a home equity line of credit may be right for you.
the bottom line
A HELOC can be an affordable way to turn home equity into cash, especially if you have a low interest rate and don’t want to touch your existing home loan. With Loan Pronto’s HELOC program, you can unlock your home equity in as little as two weeks, without touching your current first mortgage.
If you want to learn more about tapping into your home’s equity, one of our mortgage consultants can help you understand the home equity and refinancing options available to you.
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