understanding helocs and how they work

Understanding HELOCs and How They Work

With current home equity shares in a favorable position, let’s understand how HELOCs may benefit borrowers. A home equity line of credit can make it easy for qualified borrowers to take out the credit they need. But it’s important to understand the rules behind this line of credit first. Such as, how to obtain it, how much money you can receive, and how the payments will work, all to maximize the benefits.

What Is a Home Equity Line of Credit?

A home equity line of credit (HELOC) enables homeowners to use the equity on their home as collateral for a line of credit. The equity on your home, your credit score, and your debt-to-income (DTI) ratio are factors that determine the amount of credit you receive. Since HELOCs are secured with an asset, the interest rates are typically lower and credit limits are higher than with other financing options.

Since a HELOC is a revolving credit line, you may borrow up to the credit line as needed. There’s typically a draw period of 10 years during which you make interest-only payments on the amount borrowed.

How does a HELOC work?

The equity on your home determines how much you may receive as a line of credit. To calculate your home’s equity, you take the estimated value of your home and subtract the balance of your existing mortgage.

A well-qualified borrower may receive up to 85% of their home’s equity as a HELOC. The interest rates on HELOCs are typically lower than personal loans or credit cards but higher than a mortgage. Also, the interest rates on a HELOC is usually variable so they fluctuate based on the market.

What can you use a HELOC for?

A home equity line of credit can be used for a variety of purposes. However, it’s important to understand that HELOCs should be used responsibly because if you can’t repay the loan, you could risk losing your home. Below are several ways that a HELOC can be used to help you reach your financial goals:

  • Big Home Repairs: If you have a roof that needs to be replaced or an A/C unit that stopped working, a HELOC can cover these major expenses. In some cases, the interest on the HELOC might be tax-deductible for repairs. This only applies if the funds are used to increase the value of the home.
  • Home Improvements: If you have plans to make home improvements over several years, you can finance them with a HELOC. Kitchen renovations, spare bedroom additions, and finishing of a basement are examples of improvements that add to your home’s value. In these cases, the interest paid on the HELOC may be tax-deductible.
  • Paying Off Credit Cards: The interest rates on credit cards are typically in the double digits, which can drain your bank account fast. A HELOC is a great way to move high-interest balances into a lower rate and consolidate them into one loan.

Learn about HELOCs from First Centennial Mortgage

At First Centennial Mortgage, a HELOC may help put you in charge of your finances. Rated one of the top 100 mortgage companies, we strive to exceed expectations for borrower experiences. Contact us today to find out more about HELOCs.

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