HOME EQUITY LINE OF CREDIT (HELOC):
A HELOC is a revolving line of credit, secured against the homeowner’s home, that makes a certain amount of money available for the homeowner’s use as needed.
The borrower (you) only pays interest on the money you use. It is a loan set up for a maximum draw, not a fixed dollar amount and because the balance of a HELOC may change from day-to-day, depending on draws and repayments, the interest is calculated on the daily balance.
BENEFITS OF HELOC:
- Access to a revolving line of credit. The more you borrow, the less credit you have left. Repay what you borrow and your credit limit goes back up again. How much you are allowed to borrow on a HELOC is determined by an appraisal and by how much equity you have available.
- Resource to consulate high interest debts from credit cards.
- Allows borrows a chance to renovate their house before they sell providing them an opportunity to make more money
RISKS OF HELOC:
- If you miss a payment on your HELOC, the bank may initiate foreclosure proceedings. Within 90 days your home could be slipping out of your hands.
- Your equity is based on market value and if the housing market crashes your home worth can shrink dramatically, almost overnight. In that situation the bank may drastically limit your line of credit or demand full repayment of the outstanding loan.
- You may be unable to refinance your home until you first pay off your HELOC. Worst than that, you may find that you cannot sell your home for enough money to pay off your first and second mortgages.
Smart Borrowing Guidelines
Anybody who can borrow money can find themselves in trouble.
To limit your risk, only use HELOC’s when absolutely necessary. Borrow a small amount of your equity. Leave a sizeable cushion to protect you in the event that your house value suddenly plummets.
It would also be wise to only use home equity loans for projects that will value to your home – such as renovations, improvements. Think of this as a small yet sensible investment in your home to increase the sale price.
As always, if you need help buying or selling your home please don’t hesitate to contact us at any time.