HELOC Explained: Everything You Need to Know

A HELOC, also known as a home equity line of credit, is a line of credit secured by the equity in your home. Furthermore, it gives you access to a revolving line of credit, much in the same way as a credit card.

Generally speaking, a HELOC can be used for any purchase or expense. Some of the most common ways to use the funds include:

  • Home improvement project
  • Educational expenses
  • Travel
  • Medical emergency
  • To pay for a wedding or other expensive event

How a HELOC Works

As noted above, a HELOC is a type of line of credit that allows you to take advantage of the equity in your home.

As a secured line of credit, you’re in position to obtain a competitive interest rate. The rate is typically lower than with an unsecured loan, such as a personal loan.

However, there’s one thing you need to know: since you’re putting your home up as collateral, you’re at risk of losing it in the event that you default on your account.

Unlike a home equity loan, with which you receive all the funds upfront, a HELOC is a revolving line of credit. You can borrow as much or as little money as you want. Also, as you pay back the money, you can then borrow it again.

Do You Qualify for a HELOC?

If you feel that a HELOC is just what you’re looking for, it’s time to take the next step in the process. And that means finding a lender.

Once you get in touch with a lender, they can walk you through the application process. They can also discuss what you need in order to qualify. Here’s what they’ll look at:

  • The amount of equity in your home: if you don’t have equity, you won’t qualify for a HELOC. Most lenders allow you to borrow as much as 85 percent of the value of your home, less the amount you owe. 
  • Credit score and history: if you have a good or excellent credit score, along with a strong history, you’re much more likely to qualify for a HELOC.
  • Monthly income and expenses: your lender wants to know that you can afford to make your monthly payment. To make that determination, they’ll closely examine your income and expenses.

Variable Interest Rate vs. Fixed Interest Rate

When comparing lenders and lines of credit, pay close attention to whether it’s a variable interest rate or fixed interest rate.

With a variable interest rate, your rate can change from month to month. Sometimes this works in your favor, sometimes it doesn’t.

With a fixed rate, you know exactly what you’re getting into, as your rate never changes. It remains the same month to month.

Final Thoughts

If you have equity in your home and need to borrow money, consider the benefits of a home equity line of credit.

Once you speak with a loan officer, you’ll better understand if a HELOC is the right choice. And if it is, you can complete an application and secure the funds you need. 

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