The ability to build equity over time is one of the biggest benefits of homeownership. It is possible for you to finance your venture by securing low-cost funds through a second mortgage. Home equity lines of credit (HELOCs) or one-time loans are possible. Home equity loans and HELOCs Equity in your house – the distinction between the value of the property and the loan balance – can be used as collateral.
With secured loans, you are likely to get very competitive rates on your home equity loans. They are often closer to those on first mortgages. For the same loan amount, you’ll pay less financing fees than on credit cards or other unsecured sources of borrowing.
Home equity lines of credit differ from traditional loans. Similar to a credit card, they are revolving funds that can be accessed whenever you like. A bank offers a variety of options for accessing those funds, including online transfers, checks, and credit cards.
A home equity loan is very different from a home equity line of credit, which usually has no closing costs, and their interest rates are variable-although some lenders offer fixed rates for a period of time.
What are HELOCs?
Revolving credit lines (HELOCs) are frequently used to borrow money from your home equity. Borrowers can take money out of a HELOC mortgage up to a set limit, make monthly payments, then borrow again.
Unlike a home equity loan, a HELOC allows the borrower to withdraw funds as needed instead of receiving the loan proceeds all at once. You can withdraw the funds until the HELOC expires. Depending on how the credit line is being used, the minimum payment can change as well due to changes in the amount borrowed.
Pros and Cons (HELOC)
- The credit limit is the maximum you are able to borrow with a HELOC. HELOCs also offer flexibility in terms of borrowing up to the credit amount.
- In contrast, HELOCs have the disadvantage that their interest rates can increase, resulting in more expensive payments. HELOCs can be difficult to calculate because of this uncertainty.
- However, you can refinance back the capital outstanding from a home equity loan if you have been borrowing from a HELOC.
- A new loan would be issued by the lender, and proceeds would be used to repay the HELOC-which would result in the credit line closing. Borrowers would repay the funds they borrowed under the HELOC.
- Changing the HELOC balance into a fixed-rate equity loan would require the borrower to obtain credit approval, and approval is not guaranteed.
How do HELOCs Work?
There are typically two phases of a home equity line of credit. During your draw period, typically 10 years, you can take advantage of your existing credit as you wish. The HELOC contract usually requires only nominal, interest-only payments during the draw period, though there may be an option to make extra payments.
You can sometimes request an extension after the drawing period has ended. Should the period end, repayment begins. The balance disappears at the end of the term and you can no longer access additional funds.