The Ultimate Guide to HELOC

Borrowing money is something many Americans do. In fact, the average American has tens of thousands of dollars of debt. While debt and borrowing money often gets a bad rap, without it, people would struggle to buy homes, vehicles, pay for school and even handle emergency medical costs. Most of us simply don’t have the cash on hand to be able to afford things like these out of pocket.

As long as you only borrow what you can afford to pay back and make your payments, borrowing money can be a wonderful tool that can open up a lot of possibilities. While there are several different ways people can borrow, one of the most popular and common is a HELOC (home equity line of credit). 

This guide is going to go through the many aspects of HELOCs and help you understand more about whether they are right for you.

What is a HELOC?

A HELOC is a way to borrow money using the equity you have built-in your home. It is a line of credit that is secured by your home and gives you access to funds for whatever you need. They can be provided by banks or even by smaller local or online lenders.

HELOCs provide a number of different benefits when it comes to borrowing money. They often offer lower interest rates than many other options, including unsecured loans. Many HELOCs are quite flexible, and their interest may even be tax-deductible. Add that to the fact that HELOCs only charge you interest on what you borrow, and you have a great borrowing option for people who own a home.

Many are also easy to apply and be accepted for, and can give you peace of mind knowing you always have some money available if you need it.

How Do HELOCs Work?

While it often gets compared to a home equity loan, a HELOC works more like a credit card than a traditional loan. You essentially get a revolving source of funds that you can use when you need and pay back what you borrow (plus interest). The amount that you can borrow depends on how much equity you have in the home, in most cases.

It is important to know that HELOCs have both a draw and a repayment period. The draw period can normally last up to about 10 years. During this time, you are free to borrow up to the limit and pay it back as many times as you want, and this period functions like an open line of credit. All you are responsible for paying during this period is the interest on the money you borrow.

Once the draw period ends, the repayment period will begin. This can often be up to 20 years and is when a repayment schedule will begin to have you pay back the amount you borrowed, plus interest. The amount you will pay during this period depends on how much you borrowed and how much you paid back during the draw period. 

Of course, if your balance is at zero once the draw period ends, there will be no need to go to the repayment period. If you want a more in-depth look at them and how they work, check out this HELOC explanation on Space Coast Credit Union website.

Common Uses for a HELOC

So what do people use these lines of credit for? The options are relatively endless, but there are some common reasons. This includes making home renovations that will increase home value, paying for emergencies, and to consolidate debt for lower rates or simplified payments.

Many users will also use this money to make large purchases, or simply have it available to use as an emergency fund. Some people will also use HELOCs to increase their credit score. In addition to making borrowing money more affordable, raising your credit score has several other benefits to keep in mind, too. As you can see, there is no shortage of reasons as to why so many people utilize HELOCs when they need to borrow money over time.

Mistakes to Avoid When Utilizing a HELOC

While HELOCs can be a wonderful tool to pay for a variety of things, you need to ensure you are using them properly. If not, you could end up losing your home or finding yourself in serious financial troubles.

One of the biggest mistakes people make is simply borrowing too much. If you use this HELOC as a source of free cash, you could find yourself with major financial issues. You need to only borrow amounts that you are sure you can payback. If you begin to miss mandatory payments and can’t repay the line of credit, you could risk losing your home.

Another awful mistake to avoid when using HELOCs is using them for wants. If you use this money to go on a shopping spree, buy a new car or go on vacation, you are not acting very responsibly. You also want to watch out for making risky investments or business opportunities with the money from a HELOC. Again, if this opportunity or investment fails, you may find yourself unable to recoup the amount you borrowed.

Mistakes can happen, but by using your HELOC responsibly and only borrowing what you need and what you can pay back, it can be a great tool.

In conclusion, we hope that this guide has helped you learn all there is to know about HELOC. They can be an incredibly helpful and valuable tool, but it is important to use them responsibly as best as you possibly can.

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