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  • Writer's pictureChad Eliason

The 411 on Home Equity Lines of Credit

If you own a home, and have for some time, you are likely sitting on Home Equity. You might also be thinking, should I utilize the equity in my home? There is no one size fits all for this question, but you do have options. One of those options is a Home Equity Line of Credit (HELOC). Here is everything you need to know about a HELOC so you can make an informed decision for your financial goals.


What is a Home Equity Line of Credit? A HELOC allows you to borrow up to 80% of the equity in your home. Instead of a lump sum, the HELOC can have up to 65% of your equity as a revolving credit product, like a credit card, and the additional 15% minimum as a fixed portion principal and interest payment like a standard mortgage - which generally means paying out your existing mortgage, and replacing it with a new mortgage which can be up to 80% of today’s appraised value.


Some HELOCs can be combined with a mortgage portion, called a readvanceable mortgage. As you pay down your mortgage, the amount of credit available in your HELOC will go up, since the equity in your home increases.


Most HELOCs tend to have a variable interest rate for the line of credit portion. At a minimum, you’re required to pay interest on these funds used.


PROS of a HELOC:


  • Flexibility makes a HELOC an attractive option, as there is no fixed repayment schedule and you’re only required to pay interest on the funds used. This can be a great option if you have fluctuating expenses.


  • As the HELOC is revolving, you have access to the funds at any time, as long as you have credit available. You can also can pay down the amount owing without facing a penalty.


  • If you have a readvanceable HELOC option, you have ongoing access to the increased equity in your home. As your mortgage is paid down, the available credit on your HELOC will increase (up to 80% of your home’s value).


CONS of a HELOC:


  • With flexibility comes risk - there is no principal payment required on the HELOC portion, so it can be easy to start racking up credit faster than it’s being paid down. Therefore, as the amount owing on the HELOC increases, so does the minimum interest payment. This could quickly mean you’re paying several hundred dollars a month just in interest if you’re not careful with your spending.


What happens to your HELOC when you sell?


Because a HELOC is secured by your home, it will need to be paid off in full when you sell the property. Many people will use the proceeds of the sale of their home to payoff their HELOC at closing. However, if your home is worth less than your mortgage, you will still need to pay off the HELOC in full to close your home transaction.


Do you want to know if utilizing a Home Equity Line of Credit is right for you? Connect with me today, I would love to discuss this with you!

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