HELOC or Not? How to Know if a Home Equity Line of Credit is Right for You

Whether it’s for a home improvement project, making a major purchase such as a car or boat, or taking care of high interest debt, now is the time to take out a Home Equity Line of Credit or HELOC.

Here are some factors to think about when deciding whether to open a HELOC.

  • Know the difference between a HELOC and a Home Equity Loan - Although both HELOC and Home Equity Loans allow you to borrow money based on the current value of your home minus the amount of mortgage left to pay, there are key differences. In a Home Equity Loan, you take out money and start making payments at a fixed rate. With a HELOC, you decide when and how much money to withdraw when you need it, almost like a credit card, and you don't have to repay the principal right away. Also, the interest rate on a HELOC is variable and can change periodically based on the prime market rate.
  • Understand the timing - The typical HELOC lasts for twenty years. The first part is the draw period, and the second part is the repayment period. During the draw period you can withdraw money whenever you need it and only must pay the interest on the withdrawn amount. During the repayment period, you can't take money out and are obligated to pay down the amount you took out during the draw period.
  • Ask about fees - There are potential fees involved you should be aware of that can often be avoided. There are no closing costs, but there is typically a small annual fee that may be waived. There is also an early termination fee if you close your HELOC within two years, but if you don't, that fee goes away.
  • Be intentional - Make sure your HELOC fits in with your overall financial plan. People can risk losing their house by taking all the equity out of it to pay off their credit card debts and then racking up the credit cards again or by making purchases they can't afford. Don't use your HELOC to exchange one debt for another. One way to keep yourself in check is to schedule an appointment with a certified Workers WayTM Financial Coach. They are well versed in HELOC and can answer any questions and help you formulate a plan.

Once you decide to start a HELOC, you can use it to solve a variety of financial challenges from paying college tuition, to financing a life event such as a wedding or a bar/bat mitzvah. It's a very flexible product. For more information or to start the application process, please visit our HELOC webpage.


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