Thinking about Getting a Home Equity Line of Credit? Here Are the Most Important Factors to Consider.

 Considering a home equity line of credit

A home equity line of credit, or HELOC, is a revolving line of credit that’s secured by the equity in your home. Think of it as a secured credit card, with your home acting as collateral.

Just like with a credit card, you’ll have a limit. This limit represents the equity in your home. You can tap it as frequently as you want, provided you have the available balance. When you pay down your balance, that amount of money is credited to your HELOC and you can spend it again later.

When you first get your HELOC, your lender will typically require you to make an initial “draw.” This doesn’t mean you have to spend the amount you take out; it’s just a way for the bank to make money. After all, lenders are in business to make money -- and they wouldn’t make any money if you had a line of credit that you never used!

The HELOC interest rate varies with the prime rate. And since it’s a revolving line of credit, that means the interest rate is always changing. However, you can still work to lock in a better rate based on your credit history, since lenders will provide lower rates to borrowers with higher credit scores.

Who HELOCs are Best For

HELOCs are awesome for people who need access to flexible financing, possibly over a period of time. For example, if you’re a “do it yourself-er” and you often spend weekends waiting in long lines at home improvement stores, you may need flexible access to equity. A HELOC might be perfect for you.

You don’t have to use your home equity line of credit for home improvements, either. You can use it for whatever you want! However, the main reason many people use a HELOC for home improvements is that it’s an opportunity to build even more equity in your house. In this way, a HELOC really can be a powerful tool for improving your financial situation -- and glamming up your living space in the meantime.

There are no hard and fast rules for who can qualify for a HELOC, but you’ll get the best possible terms if your credit is in good shape -- so it may be worth it to build your credit before applying for a home equity line of credit.

What Should I Consider Before Getting a HELOC?

There are tons of benefits to the HELOC. However, every loan or credit line has one major downside: you’re paying money to borrow money. But also like any other credit card or loan, it’s all about how you use it. Here are a few things to ask yourself before you start shopping for home equity lines of credit.

Am I risk-averse?

If so, a HELOC may not be for you. With a HELOC, the risk is even bigger than with a conventional unsecured credit card. With a credit card, if you don’t pay your balance, your credit score will drop and your lender may attempt to collect in various ways -- but you typically won’t lose your house. If you don’t repay a home equity loan, on the other hand, you could lose your house to foreclosure.

Can I handle the financial burden of another mortgage?

With a HELOC, you’re literally borrowing the home equity you’ve accumulated over the years and taking out a second mortgage. Rather than letting the equity sit (and continuing to build), you’re starting back at ground zero when you had no equity built up in your home at all. And looking at the bigger picture, if the housing market takes a nosedive, you could be underwater pretty quickly. It’s not a decision to make lightly.

What kind of consumer am I?

HELOCs are also problematic for some types of consumers. Just like a credit card, you can burn through the credit line quickly if you’re not paying good attention. If you’ve historically had trouble keeping credit cards paid off or forgetting to make regular payments, you may not be ready for a HELOC just yet.

Is my income stable?

HELOCs generally have an adjustable rate, which is problematic when the Fed is talking rate hikes. You could easily find yourself with a payment you can’t make if you opt for the HELOC and max it out without a plan in mind. However, if you have a stable source of income, you may not suffer much of a blow when monthly payments change.

If you’ve determined a HELOC is the right move for you, congratulations! Now it’s just a matter of finding the best lender with the best rates. Let home.loans do the heavy lifting for you -- just contact us and we’ll hook you up with the best HELOC lenders near you.