A HELOC (Home Equity Line Of Credit) can be a great financial tool for solving lots of different kinds of financial needs, wants and problems. If you have equity in your house (more than 20%), and a good borrower profile (not necessarily great, good is good enough), having a HELOC at the ready may be a way to address, prevent or finesse the myriad of financing land mines that life can offer up.
I get calls all of the time about refinancing to consolidate debts or take cash out for home improvements, tuition, new cars, etc. using a refinance of current mortgage debt, but more often than not, the best option is a HELOC.
A HELOC is just what it says it is, a credit line based on the equity in your home. You pay interest only on the amount of the credit line that you actually use, and typically, you are not required to amortize principal for the first ten years. A HELOC is a 2nd mortgage on your home but works like a credit card with your house as collateral but without those crazy double digit credit card interest rates.
HELOCs are cheaper and can be easier to get than new first mortgage refinance loans, fees and costs are minimal but credit, income and asset qualifying are still required. And there is no such thing as a stated income HELOC, don’t ask.
Every lender has the same basic product; there is very little variation in structure although pricing can vary. The interest rate is usually prime (currently 3.25%), or prime plus margin, even prime minus margin as some lenders want to chase your other financial business. Repayment is interest only on the amount of the credit line you actually use, usually for the first ten years, then principal and interest is amortized over the remaining term of the loan. It is cheap money with manageable repayment terms.
Your bank is a great place to start your HELOC search, and since banks are all about expanding the scope and depth of their relationship with you, this may be the only place you need to go. Walk into the lobby of a nearby branch or go to your bank’s website and see what they are offering. Of course, take the time and make the effort to research other HELOC offerings at other banks so that you can be sure that what your bank is offering is competitive.