Ever heard of a credit card that is secured by your home? No? Well, you have if you have ever heard of a Home Equity Line of Credit, or HELOC. A HELOC is a line of credit that is secured to your home as a mortgage, and is one of the more unique and versatile loan types available for your home.
HELOC’s are often added as a second mortgage, behind a more traditional mortgage product, but can certainly be the primary or only mortgage on a property. A home equity line of credit is unique from other home loan types in that it is a line of credit. Other home loan types are often a fixed amount, with a fixed re-payment plan, and a fixed purpose. Meaning, the funds from a more traditional loan can only be used for specific purposes.
While this can sometimes be true for a home equity line of credit, it is typically available to be used for whatever reason. In addition, being a line of credit, as you pay the debt down, you have access to that credit again, and can access it for other needs. With a traditional mortgage, once you pay it down or off, you can’t re-access those funds without going through the process of applying for a new loan. With a HELOC, that credit is there and available. While you typically apply for and are approved for a credit line up to a certain amount, you can use only however much you need. For example, if your HELOC credit line is $30K, but you only need $15K, then only use $15K! And, of course, you only have to pay back $15K. This offers a level of flexibility that you can’t get with other traditional mortgage loans.
Interest rates on home equity lines of credit are often higher than your typical mortgage loan products, and are also often variable rates, adjusting as the markets change. This does provide a bit of uncertainty, and is the main reason this is not typically the default loan type used home purchases or refinances. While a HELOC certainly could be used towards those goals, these are often used in these other ways:
- Home improvement
- Debt consolidation
- Pay for a wedding
- Pay for elective/cosmetic surgery
- Make up a shortage on a purchase transaction
- Emergency fund
There are certainly other ways these types of home loans are used, but these are some of the most common.
When exploring your options, keep a HELOC in mind. If you need a line of credit available to you as you need it, or if you aren’t entirely sure exactly how much (or how little) you’ll need for your project, then a HELOC may be right for you. Just be aware of the rate terms (how is the rate determined and how often can it change) and keep in mind that it is an open line of credit – for some, this may be a pitfall if you aren’t good with credit line discipline.
And, if you’d like to talk with a mortgage loan professional about your home loan options, please fill out our application to the right, and we’ll get you in touch with someone who can help!