What A HELOC Is & What Its Not<\/h2>\n
As I mentioned above, a home equity line of credit is not the same as a home equity loan.\u00a0 The key difference is a HELOC is a revolving source of money.<\/p>\n
In short, it works the same as a credit card.\u00a0 This has huge implications on your credit report as well as the cost relative to a loan.\u00a0 I discuss this more in detail below.\u00a0 However, before doing so I\u2019ll provide you with more HELOC details.<\/p>\n
Banks provide a number of different ways to access the money.\u00a0 For example, you can:<\/p>\n
- \n
- Do an online transfer to your other accounts;<\/li>\n
- Write a check; and<\/li>\n
- Use a credit card connected to your account.<\/li>\n<\/ul>\n
In addition, home equity lines of credit have low or no fees to open.<\/p>\n
In regards to interest rates, most are variable interest. However, more and more banks\/lenders are offering fixed rate HELOCs.<\/p>\n
That is one of the reason why we\u2019ve partnered with Neo Home Loans and Movement Mortgage.\u00a0 They both offer fixed rate loans which I personally tend to gravitate towards because they are less risky.<\/p>\n
Why Have A Home Equity Line Of Credit<\/h2>\n
There are two primary financial planning<\/a> reasons to have a HELOC and three secondary reasons.<\/p>\n
Primary Reasons For Having A HELOC<\/h3>\n
The two primary reasons are:<\/p>\n
- \n
- Emergencies; and<\/li>\n
- Consolidation of high rate debt.<\/li>\n<\/ul>\n
Like the saying goes, shit happens.\u00a0 For example, your house can burn down.\u00a0 If this happens you can\u2019t get a loan against your house anymore because your house doesn\u2019t exists.<\/p>\n
Another common emergency is losing a job or a disability.\u00a0 Both of these situations may cause you to lose your income.<\/p>\n
At that point you can\u2019t qualify for a mortgage.\u00a0 Therefore, I\u2019ve seen a lot of people panic.\u00a0 Then they \u2018fire\u2019 sell their homes so they can get the equity from it.\u00a0 When that happens you may not get the most value from your home.<\/p>\n
However, you don\u2019t have to panic if you have a line of credit.\u00a0 You can draw against it and take time to sell your house!<\/p>\n
You may also have high interest rate debt such as credit cards.\u00a0 HELOCs have lower rates because they are backed against the equity in your house.<\/p>\n
Also, you may have a previous loan at a high fixed rate and rates have dropped.<\/p>\n
For example, you may have a car loan with a 7% interest rate.\u00a0 However, the current rate on your HELOC may be 3.5%. You could refinance your car loan but might have to pay fees. With the HELOC you simply draw against it and pay off your car loan.<\/p>\n
Secondary Reasons For Having A HELOC<\/h3>\n
The three secondary financial planning reasons are:<\/p>\n
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- Credit score manipulation;<\/li>\n
- Reducing the need for an emergency fund; and<\/li>\n
- Staging\/fixing your house to sell it.<\/li>\n<\/ul>\n
I discuss credit score manipulation later in this article.<\/p>\n
You can also use a home equity line of credit to build wealth.<\/a>\u00a0 This is the case because having one reduces the need for an emergency fund. \u00a0<\/p>\n
You may be selling your house.\u00a0 There are a number of statistics that show staging a house will get you a higher sell price.<\/p>\n
Maybe you do an analysis and realize that new paint will get you more money.\u00a0 Or maybe updating a bathroom will get you a higher sell price.<\/p>\n
There are a number of ways to increase the value of your house prior to selling it.\u00a0 You can use cash for this but many opt to use a line of credit instead.<\/p>\n
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<\/a><\/p>\nHow A Home Equity Line Of Credit Works<\/h2>\n
Most of the time a home equity line of credit has two phases.<\/p>\n
The Draw Period<\/h3>\n
The first phase is called the draw period.<\/p>\n
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- The most common draw period is ten years.<\/li>\n
- During the draw period, you can borrow against you HELOC at any time. Any money you don\u2019t take is not charged interest similar to a credit card.\u00a0 For example, if you have a $50,000 home equity line of credit but have not used it, i.e. the balance you owe is $0, then you are not charged anything.<\/li>\n
- During the draw period, most HELOC payments are interest only. For example, if I\u2019ve drawn $10,000 on my line of credit and have a 6% interest rate, then my monthly payment would be $50<\/li>\n
- Most banks allow you to make extra payments during the draw period that are used to reduce principal.<\/li>\n<\/ul>\n
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<\/a><\/p>\n