Home Equity Line of Credit (HELOC)

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 What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit, commonly abbreviated as a HELOC or HELOC terms, is defined as a type of credit line offered by banks to homeowners that enables them to borrow money for a certain period of time. The credit line operates similarly to a credit card or a second home mortgage.

Generally speaking, homeowners tend to use HELOCs when they require extra financial support for high-priced items. Some different types of HELOC loans include:

  • Those for home renovation projects;
  • To pay off large hospital or medical bills;
  • To consolidate debts; and/or
  • To pay tuition for an educational program like college or graduate school.

Eventually, the amount borrowed under this type of credit line will need to be repaid to the lending institution with interest.

It should also be noted that homeowners will need to meet a lending institution’s specific requirements before they may be eligible to apply and receive a HELOC. Some basic home equity line of credit terms that you may need to qualify for in order to gain approval include:

  • Having a good credit score (usually around a score of 620 or higher);
  • Having a reputable credit history;
  • Proving you have a source of monthly income;
  • Having a debt income ratio that is approximately 40% or less; and
  • Owning a home that has a value of at least 15% more than what you still owe on your remaining mortgage.

In addition, it is important that you check the terms of a HELOC for your particular lending institution since the above terms can vary by lender. Also, if you need further assistance with obtaining a HELOC, you should consult with a real estate lawyer in your area before you agree to any terms.

What are the Advantages of a Home Equity Line of Credit?

There are various advantages to using a home equity line of credit. For one, they offer homeowners a way to borrow money with flexible terms. As previously mentioned, HELOCs are similar to a credit card, meaning that homeowners are typically allowed to make withdrawals whenever they want and can repay that amount either on a daily or weekly basis.

Another advantage that is often associated with HELOCs and their accompanying credit lines is that because they offer revolving credit lines, each repayment of a withdrawal will reset the credit line. This allows homeowners to continuously tap into that credit line and borrow up to the maximum amount, so long as they keep repaying it.

In addition to flexible terms and revolving credit lines, HELOCs tend to have a lower interest rate than other types of loans or credit lines. This can be useful for borrowers who are able to repay withdrawal funds immediately and to keep costs low when borrowing for certain expenses, such as paying off medical bills.

Lastly, one other advantage to using HELOCs is that the withdrawal and repayment periods can be negotiated and modified by communicating with the lending institution. For example, a bank may be willing to work with a homeowner who has a good credit score and good credit history to structure their HELOC in a way that is tailored to the homebuyer’s specific needs.

Are there Any Disadvantages of a Home Equity Line of Credit?

Homeowners should also be aware that there may be some potential disadvantages to using a home equity line of credit, such as having to pay penalties. For example, if a homeowner fails to make payments on their withdrawals within the appropriate amount of time, then they will be at risk of losing their home and/or having their HELOC frozen or cancelled.

Depending on the terms of a specific HELOC, this means the homeowner may be partially restricted or entirely prohibited from accessing their line of credit or HELOC account.

Another disadvantage associated with HELOCs are the interest rates. In general, HELOCs require homeowners to pay interest. This may be the case even when the homeowner is still within the withdrawal period and the repayment amounts are not yet due. HELOC rates may also fluctuate over time and can be volatile since the rates are set in accordance with the market.

In addition to interest rates, HELOCs sometimes have attached loan conditions. For instance, a homeowner may need to pay interest on the withdrawal amounts and to access the credit line itself. Homeowners also often have to pay transactional fees on HELOCs and costs or fees to close their HELOC account.

Is a HELOC the Same as a Home Equity Loan?

Despite the fact that the two concepts are often conflated, a HELOC is not the same type of financial instrument as a home equity loan. However, the two do share some common features, such as that they both allow a homeowner to take out equity against their house and both permit a homeowner to use their house as collateral. They also sometimes have similar terms and conditions, but again, they are not the same for some of the following reasons.

For one, unlike a HELOC, individuals who take out a home equity loan will receive a lump sum payment up front, along with an interest rate that is typically set at a certain percentage. A home equity loan also allows borrowers to repay the amount they took out for a loan over a longer period of time. This is in contrast to a HELOC, which requires homeowners to repay what they owe as soon as a withdrawal is made.

On the plus side, a homeowner who applies for a HELOC will not be required to pay back the entire amount of the HELOC, but only the amount of money that they actually withdraw. An individual who borrows a home equity loan, however, will be required to repay the entire amount back regardless of how much they spent. This is because borrowers receive the full amount of a home equity loan up front.

Is the HELOC or the Home Equity Loan Right for Me?

Whether a HELOC or Home Equity Loan is the right choice for a homeowner can only be answered by the homeowner themselves. There are some instances wherein a bank may require that a homeowner apply for both types of loans at the same time, but normally the homebuyer should know which one would be best suited to their situation before they submit an application.

For instance, a good question to answer prior to filling out an application is whether the homeowner needs a line of credit or a loan to pay for a one-time, large expense (e.g., a hospital bill), or if they will need the financial support for a longer period of time. If it is for the former, then the homeowner may want to apply for a single home equity loan.

On the other hand, if the answer is for the latter, such as for a home renovation project where prices can fluctuate, then it might make more sense to apply for a HELOC. This is especially true in cases where a homeowner intends to immediately repay the withdrawal amounts that they take out of their HELOC account. Again, HELOCs allow for greater flexibility and homeowners can negotiate with their bank for lower interest rates.

Should I Hire a Lawyer for Help With a Home Equity Line of Credit?

Although you do not necessarily need to hire a lawyer in order to obtain a HELOC, it may be in your best interest to consult with a local mortgage lawyer to at least have them review the terms. Much like a standard mortgage contract, HELOCs can be difficult to comprehend due to their legalese. If you do not understand your obligations under the terms of your HELOC, then you may be putting yourself at unnecessary financial risk.

A mortgage lawyer will be able to explain the conditions of your HELOC and your obligations in clear and concise terms. Your lawyer will also be able to help you negotiate different interest rates and/or withdrawal periods with your lending institution.

In addition, if you need to challenge the terms of a HELOC or if there is a dispute involving your obligations under a HELOC, your lawyer can provide legal representation as well as other legal services to assist in resolving such issues in an efficient manner.

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