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Is a Home Equity Line of Credit the Perfect Match?

November 12, 2019

Are you looking to book the trip of a lifetime, finance your child’s college education, consolidate debt, or complete a large home renovation? When it comes to funding a large expense, it’s important to explore the right lending solutions for you. If you’re a homeowner with equity in your home, a Home Equity Line of Credit (HELOC) might be worth considering. Like a credit card, a HELOC provides consumers the ability to borrow and repay as they withdraw, but with a much higher credit limit and often times, with a lower interest rate. When contemplating any financial decisions, knowledge is key. Be sure to weigh all the pros and cons before taking the next steps to apply.

When to Tap into Your Home’s Equity

Although a HELOC can be used for multiple purposes, some of the most common uses for borrowing against your home’s equity are:

Home Renovation

Is your home in dire need of aesthetic or structural improvements? Maybe you’re looking to add on a room or remodel your kitchen? Even modest home renovations can run anywhere between $20,000 to $100,000 or more – making them costly expenses. A HELOC helps to put your plan into motion by offering the upfront capital needed to pay contractors in the beginning stages, and the additional cash reserve as the project continues. With the ability to withdraw more cash as needed, you can borrow only what is necessary and possibly save on interest in the long run. Research has shown, for example, that investing in minor kitchen repairs can help to increase a home’s value. It might be worthwhile to research which home renovations can give you the most bang for your buck and how a HELOC can make it a reality.

Debt Consolidation

A HELOC can also help to pay down or even consolidate high-interest debt. As a homeowner, borrowing against your home’s equity can reduce outstanding personal debt, including credit card debt, in a quicker fashion. The interest rate and monthly payments for a HELOC are often lower than a credit card.

College Education

HELOCs are a sensible option for consumers looking to finance their children’s college education. Depending on student loan options, a HELOC can offer a lower interest rate than what is being offered. When exploring all your options, talk to your bank about if a HELOC can be the right lending solution for this financial endeavor.

Things to Consider

When deciding if, or what type of HELOC is the right match, it’s important to consider all the factors associated with them. To help guide you throughout the process, make note of these points when shopping for a HELOC:

Interest Rates

The rate on a HELOC can be variable or fixed. The intro rate for a variable rate HELOC is often lower and more attractive. However, if you’ve read our most recent article, What September’s Prime Rate Change Means to You, then you’re up-to-date on all the recent Fed rate changes that impact HELOC’s . Although the Prime Rate is the lowest it has been in decades, it’s important to keep in mind that interest rates could fluctuate in the future, and impact monthly payments. If the uncertainty of a variable rate seems too unsettling, investigate a fixed rate HELOC.

Rate Caps

If you’re considering a HELOC with a variable rate, it’s helpful to research how rates are capped. Does the lender have a maximum interest rate cap for a period, or a cap on how low a rate can go? Keep these questions in mind when consulting with an expect.

Draw Period & Fees

A draw period is the period of time a consumer can withdraw money before they must begin paying back the principal on the loan. Be sure to ask about draw periods, so you can make withdrawals accordingly. Research if there are any closing costs, annual fees, or pre-payment fees associated with the HELOC, as these can add up quickly!

Risks

It’s also important to keep in mind the potential risks that come along with a HELOC. While defaulting on standard financial commitments can impact a consumer’s credit score, defaulting on a home equity line of credit puts one’s house at risk.

The Amount You Can Borrow

When calculating the amount a consumer can borrow with a HELOC, it’s best to research the lenders standard borrowing limit. Some lenders allow consumers to borrow up to 80% of a home’s value, minus the current mortgage owed. This means that if your home is worth $500,000 you could finance a total of up to $400,000 (80%). If your mortgage balance is $250,000, the maximum line of credit you could borrow could be $150,000.

Next Steps

Now that you understand the basics of a home equity line of credit, please don’t hesitate to contact us to discuss your unique circumstances. We can help you determine if a HELOC is the best option vs. refinancing your existing mortgage.  With traditional mortgage rates at historic low levels, a “cash-out” refinance may make more sense in the long-run. We would be happy to answer all of your questions. If you’re ready to take the next steps in opening a home equity line of credit, check out our Mortgage Center and begin the application process today!

Jim Oosterman is the Senior Vice of Melrose Bank and a lifelong resident of Melrose. He can be reached by telephone at 781-665-2500, online at melrosebank.com, or on Facebook at facebook.com/MelroseBank.


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