How to handle a HELOC

That crash you just heard was the wet spot in the living room ceiling caving in, bringing your upstairs, downstairs. Sometimes home repair projects can’t wait for payday. With a home equity line of credit (HELOC), if approved, you can use some of the equity built up in your home to make improvements or cover yourself in case of an emergency. Here’s how to handle a HELOC.

HELOC benefits
A HELOC is a line of credit that allows you to borrow against the value your home has built up. It’s open-ended, so you can withdraw only the money you need, as you need it. HELOCs allow for financial flexibility. You can withdraw money as needed over a set amount of time known as the “draw period.” Withdrawals cannot continue beyond that period. This is especially beneficial if you don’t know exactly how much money you’ll need.

Repayment options for HELOCs vary, but are usually flexible. When the draw period ends, some lenders allow you to renew the credit line, while others allow you to make payments over another set time period.

Monthly payments also vary. Some lenders only require monthly interest payments on the HELOC and then collect the entire principal at the end of the draw period. This can be beneficial when borrowing for an investment which will hopefully yield a sizable payoff.

Additional considerations
HELOCs have variable interest rates, meaning the interest you’re paying on the loan fluctuates over the loan’s term. Taking out a HELOC in an environment of rising interest rates means your rates could increase over the life of the loan.

Also, HELOCs that require repayment of the entire principal at the end of the term can also prove to be difficult for borrowers. If you can’t pay the large amount, you will be forced to refinance with another lender. That could possibly mean an unfavorable interest rate. Your financial institution may offer a home equity loan, different from a HELOC, which offers a fixed rate over the life of the loan.

You’ve worked hard for your home. It’s time to put it to work for you.

Article provided by Local Government Federal Credit Union.
The advice provided is for informational purposes only. Contact your mortgage lender or tax advisor for additional guidance.