Understanding How a HELOC Can Help

BY: Desiree Wood


There are a handful of ways to tap into the equity you’ve built up in your home by paying your mortgage each month:

  1. Cash-Out Refinance
  2. Home Equity Loan
  3. Home Equity Line of Credit (HELOC)

The key is to use the right tool for the job.

A HELOC can serve as a useful tool in your overall financial toolbox. Let’s look at how a HELOC can help you meet your cash flow needs.

Different Than a Loan

A HELOC is a line of credit that uses your home as collateral. In a general sense, it works more like a credit card than a typical loan. Some of the biggest differences between a HELOC and a Home Equity Loan include:

  • BORROW now and/or later. Typically, a loan is used for a specific amount of money that is paid out in one lump sum to the borrower. In contrast, a HELOC can be drawn on multiple times for various amounts…or not used at all and simply available on a moment’s notice as a safety net.
  • PAY now and/or later. While payments on the principal and interest for a loan begin the month following your loan closing, a HELOC offers the flexibility of interest-only payments for an established period – often up to a decade – with the option of paying down the principal before required payments begin if you choose.
  • Be aware of interest rates. A Home Equity Loan usually offers a fixed interest rate resulting in predictable monthly payments. While interest rates on a HELOC are usually far below those paid on typical credit cards, they do tend to carry a variable interest rate. Depending on what you use the money for, the interest you pay for either a loan or line of credit may be tax deductible. Be sure to keep receipts and ask your accountant or tax advisor for more information.
  • Enjoy minimal closing costs. A Home Equity Loan usually carries closing costs similar to a mortgage. However, the fees to establish a HELOC are often minimal, such as a small annual fee.

Popular and Versatile

One of the big advantages of a HELOC is its versatility. Thanks in large part to the “borrow now and/or later” feature, a Home Equity Line of Credit can be used for a large one-time purchase (like a loan) or for occasional needs to cover temporary cash flow concerns.

Examples of large one-time purchases:

  • Home improvement project
  • Landscaping project
  • Down payment on a cottage
  • Consolidate debt under one payment

Examples of occasional or variable draws:

  • DIY home improvement project completed in small pieces over time
  • Paying a health care bill you want to spread out
  • Dream vacation paid in installments
  • Club sports fees
  • Unexpected pet surgery
  • Home repair due to storm damage
  • Portion of auto repair not covered by insurance
  • Evening out variable income (freelance, sales based on commission, spreading out large end-of-year bonuses)

In addition, some people choose to maintain an open HELOC with no balance just to have a safety net for emergency purposes. While this is not a new concept or practice, many customers especially appreciated the security of having access to a line of credit during the volatile financial circumstances over the last few years due to the pandemic.

One word of caution: a HELOC should not be used for incidental or non-essential living expenses. Like a credit card, that type of spending can add up fast and create unnecessary debt. You don’t want to put your housing in jeopardy for little extras at Target or Walmart. 

Put a HELOC in Your Toolbox

Your home is likely your largest asset. Consider including that equity as part of your financial toolbox to navigate all sorts of situations and stages of life. An open line of credit can provide security, fund an improvement project, or help even out the financial ups and downs at certain times of the year.

For more information about HELOCs and whether a line of credit might be the right fit for your family finances, call a Lake Ridge Bank location near you or visit our website to apply online.

Author:

Desiree Wood

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