ARE you searching for the right home loan? If so, you should know that there are many options, even when purchasing your home. But which one is right for you?
In this article, we shall focus on one of the many available loan options: a HELOC loan.
What is a HELOC Loan?
A HELOC, which in full, means Home Equity Line Of Credit, is a revolving credit that lets you borrow against your home equity.
It’s also a second mortgage on your house because you can use it for various purposes.
You can use a HELOC for various purposes such as consolidating debt, paying bills, home improvements, or buying other items.
Home equity lines of credit are available from banks, brokerages, credit unions, and finance companies. Rates and terms vary from lender to lender and from one HELOC product to the next.
Now that you know what a HELOC loan is, here are five other important things to know about HELOCs:
1. You can use a HELOC loan to access up to 95% of your home’s equity
You can use a HELOC loan to access up to 95% of your home’s equity. We define equity as the difference between your home’s current value and what you owe on it.
If you want to buy a new house, pay for renovations, or consolidate debt, a HELOC loan, such as Sofi’s HELOC loan, can make all that possible at the best market rates.
One thing to note about applying for a HELOC loan is that some lenders may require additional documentation before approving a HELOC loan.
2. You can withdraw from this line of credit up to the limit
As mentioned, a HELOC is a revolving credit line that gives you access to cash over time.
It is like a well-structured boot camp in the sense that it is very programmed, meaning you can withdraw from this line of credit as needed up to the limit.
However, failing to pay off your balance in full each month means the amount you owe will keep increasing until it reaches your maximum credit line.
We call this “carrying over,” and it can result in paying more interest over time than if you had just paid off what you owed at the end of each month.
3. The interest rates for HELOCs are usually variable and can fluctuate with the market
The interest rates for HELOCs are usually variable and can fluctuate to mirror the market. As a result, they’re often higher than traditional loans, which means you’ll pay more interest over time.
However, suppose you can pay off your HELOC before its variable rate increases (which it might). In that case, HELOCs are attractive to anyone who wants to use their home as collateral for loans that carry higher monthly payments than other types of financing do.
4. Mostly, you pay interest only on what you borrow
Thanks to their structure, you will only pay interest on your borrowed money. A HELOC loan allows you to borrow and use the money for a purchase down payment, to pay off other debts, or save.
If you pay the HELOC loan facility back in full before the end of its term, you will not pay any interest.
You’ll also get a tax break on any value gains due to appreciation (the difference between what you borrowed and repaid).
5. You can also pay interest on your outstanding balance if you qualify for an interest-only HELOC
Interest-only HELOCs have become more common and popular in recent years.
These loans typically have shorter terms and lower interest rates than their parallel cousins (fixed-rate HELOCs) and require a higher down payment.
You can pay interest only or amortize the balance over time by paying off the entire loan principal at each monthly payment date.
The key difference between the two options is the interest you will pay on any unpaid principal amount at the end of each month until you have the loan paid off completely.
On the other hand, amortizing payments allows you to spread out your monthly payments over several years (or longer).
Conclusion
Sometimes it can be challenging to know what a HELOC is and what it does.
This article has gone over what they are and five key things you need to know about them to use them effectively.
