MORTGAGE
What Is a HELOC?
What you'll learn: Understand what a HELOC is and how it’s different from a home equity loan
EXPECTED READ TIME: 3 MINUTES
February 22, 2021
What is a HELOC?
If home improvement projects are on your agenda — and as a homeowner, when aren’t they? — a HELOC might be an option to consider. Not quite sure what a HELOC is or how it’s any different from a home equity loan? Here’s a walkthrough of the basics to help you determine if taking out a HELOC may be right for you.
HELOC stands for home equity line of credit. A HELOC leverages the equity in your home as collateral and is a revolving source of credit, similar to a credit card. Generally, with a HELOC, your lender sets a credit limit, and you can borrow up to that amount throughout a draw period, which often lasts 10 years. After that, you may potentially be able to renew your credit line or pay back the amount you borrowed with interest. Most lenders offer a repayment period of up to 20 years.
How can you access a HELOC?
You can typically access your HELOC account funds in a few different ways, depending on the lender. Some lenders allow you access by writing checks that pull from your HELOC account, using a credit card connected to your account, or transferring funds from your HELOC to another account.
How is a HELOC different from a home equity loan – and which is better?
Although a HELOC and home equity loan are similar, there are differences to note. Either may be the better choice for you, depending on factors such as why you need the funds, the duration for which you’ll need them, and your preference of repayment.
With a HELOC:
- You get a line of credit you can access as you need, often for 10 years
- Interest rate is variable and may be more favorable than other kinds of loans
- Pay back requires interest-only payments throughout the draw period, then regular monthly payments with principal and interest
With a home equity loan:
- You get one lump-sum amount
- Interest rate is often fixed, but may be higher than a HELOC rate
- Fixed monthly repayment schedule
What can you use a HELOC for?
A HELOC can be used to meet a variety of needs, but it might be best served for ongoing, longer-term expenses for home renovations and repairs. That way, you can continually draw from it as you take steps to increase the value of your home.
Regarding other uses, some homeowners take out a HELOC to help pay down high-interest debt and consolidate debt. You can also use HELOC funds to help with ongoing medical expenses, educational expenses such as college, or more expensive discretionary items, but you’ll need to decide whether you want to tap into your home equity for those kinds of costs.
What should you consider before taking out a HELOC?
First, make sure you’re clear on why you need a HELOC and how you plan to use it. Next, examine the benefits and risks of a HELOC as compared to other options such as a home equity loan, a personal loan, or even a cash-out refinance. If you'll be using a HELOC to consolidate higher-interest debt, think ahead about how you can avoid piling on additional high-interest debt going forward.
Need more insight into what leveraging the equity in your home might look like for you? We've compiled a 10-point list to help as you research your options and decide whether a HELOC might work with your financial situation and align with your goals.
If you have more questions about HELOCs, including how to apply for one, you can contact PenFed:
- Call 866-386-7254
- Visit the Mortgage Center