As you pay down your mortgage or the value of your home increases, you develop equity. When you have equity built up in your home, borrowing against it with a Home Equity Lines of Credit (HELOCs) is a great way to tap into the money when you need it most. Many people take out a HELOC to finance home improvements, pay for college education, cover unforeseen medical costs, and many other purposes. Here’s all you need to know about HELOCs.
What is a HELOC?
A HELOC, is a secured loan that allows homeowners to borrow against the equity in their home. The loan amount is determined on the difference between the home’s current market value and the homeowner’s outstanding mortgage balance.
Over time, as you pay down the loan and/or the value of your residence increases, so does your equity. You can take a HELOC out against the equity you have built up in your home, essentially borrowing against your home’s value minus what you still owe on your mortgage. It’s important to note that a HELOC is a second loan against your home. You’ll still need to pay your primary mortgage along with new payments for your HELOC.
A lender will typically want you to have at least an 80 percent loan-to-value (LTV) or less to approve the loan. For example, if you get an $80,000 mortgage to buy a $100,000 house, then the loan-to-value is 80% because you received a loan for 80% of the home’s value.
Interest rates on HELOCs
Some home equity loans tend to have fixed-rates, HELOCs, generally have variable rates and allow the borrower to withdraw funds as needed.
A variable rate periodically changes during the term of the loan based on economic conditions. The monthly payment stays the same, however, the interest rate can fluctuate over the entire loan term. If the borrower sells the home before the loan term is matured, the loan must then be repaid in full.
If a fixed rate appeals to you more, Partner Colorado does offer a fixed rate HELOC. With a fixed rate, you lock in the rate for the life of the loan. As you access funds, the interest rate stays the same.
A HELOC can be a great choice for a borrower with a one-time or straightforward cash need such as a home addition, large medical expenses, debt consolidation, or a wedding.
Are there any costs associated with HELOCs?
As with mortgage loans, there can be closing costs associated with HELOCs. Closing costs refer to any fees incurred when originating, writing, closing, or recording the loan. These fees include application, appraisal, title search, attorney fees, and points.
However, right now, with a Partner Colorado HELOC, you can enjoy no closing costs with no application fee or annual fee.1
What are the pros and cons of a HELOC?
There are several advantages to taking out a HELOC to fund a home improvement project or a large expense.
- The amount of interest paid toward a HELOC may be tax-deductible.2
- Interest rates on HELOCs are generally lower than those provided by credit cards or unsecured loans.
HELOCs do have some disadvantages as well.
- Using your home as collateral for the loan means risking foreclosure and the loss of your home if you default on the loan.
- If the value of your home declines over the term of the loan, you may end up owing more than your home is worth.
- You may need to pay closing costs and other fees when you take out a HELOC.
- You may qualify to borrow more than you actually need and ultimately end up using more than planned, which of course you’ll need to repay.
The hot real estate market has led to a boom in popularity for HELOCs. However, it’s important to weigh all factors carefully before determining if a HELOC is best for your specific needs.
1Certain conditions and restrictions may apply. No closing costs in most cases. An upfront appraisal fee of $450.00 may be required at member expense on loans greater than $75,000.00 or loan-to-value exceeding 70%. 2For specific tax advice please consult a qualified tax professional.