Home Equity Line of Credit

What's a "Home Equity Line of Credit" or HELOC

A home equity line of credit is a great way to take advantage of the equity in your home and have extra cash readily at your disposal. With the real estate market booming all over the country, it’s no surprise that home prices are higher here in Summerville and the greater Charleston area as a whole. This has created ideal circumstances for homeowners to take advantage of their increased home value.

So first, let’s talk about what a home equity line of credit is. Equity is the difference between your home value and what you still owe on your home. For example, let’s say a homeowner’s home is worth $200,000 and they only owe $100,000 on their mortgage. They have $100,000 in equity.

A home equity line of credit, you’ll see and hear this referred to as a HELOC (“he lock”), is a loan that is secured using the equity in your home. Typically, lenders allow homeowners to borrow up to 85% of their home value minus the amount you still owe. Using our example above, here’s the math.

$200,000 x 0.85 = $170,000 (85% of current home value)

   $170,000 (85% of current home value)

- $100,000 (amount owed on mortgage)

   $70,000 (amount available to borrow with HELOC) 

This homeowner could have a line of credit of up to $70,000 at his/her disposal.

Uses of HELOC

Homeowners can use funds withdrawn from a HELOC on anything. Some of the most common uses are for home improvements, pay off other debt such as credit cards, medical debt, student loans, fund a vacation, or use for a down payment for a second home or investment property.

Pros of a HELOC

• HELOCs allow you to access cash that would have otherwise been tied up in your home.

• The line of credit with HELOCs is accessible for a set length of time called a draw period, usually 10 years. This allows you to use the funds at your discretion during this time. Once taken out, you can repay the funds and then borrow it again. You can kind of think of it like a credit card. Once, paid off, the amount you can borrow, goes back to the original line of credit amount.

• One of the best features of a HELOC is you only pay interest on funds you actually use. For example, if you take $20,000 to renovate your kitchen, you only pay interest on that $20,000 not the entire line of credit.

• Interest rates are usually much less expensive with a HELOC than other alternatives such as credit cards and the cost to setup a HELOC can be less than $500.

Cons and Risks of a HELOC

• HELOCS typically do have costs associated to them to get started such as an appraisal costs and bank/lender fees, however, in most cases they are much lower than a “cash out refinance”. (See our blog on Cash-out-Refinance).

• Interest rates are often variable and fluctuate with the market. This means the rates could rise before the repayment period ends.

• Some lenders require minimal draws on their line of credit.

• If you do not make payments on your HELOC, it can damage your credit.

• Because your home serves as collateral on your HELOC, missing your payments and defaulting could result in the bank repossessing your home. But remember, the bank only allows up 85% equity be taken out so there is still 15% equity remaining in your home so selling to pay off the HELOC is usually the best option in a worst case scenario.

• So, to summarize, a HELOC is a great way to have access to extra cash when you have considerable equity in your home. With a HELOC, you’ll have cash available to use if you want or need it, however, it doesn’t cost you a dime if you don’t (not counting the startup costs).  While Home Grown Real Estate are experts at helping clients buy and sell homes in South Carolina, we are not financial or tax experts! It’s important that you speak with a licensed financial planner, mortgage broker, or tax professional to crunch numbers, review your financial goals and see if a HELOC makes sense for you.