HELOC Pros and Cons

Secured by Home Equity

Both home equity loans and HELOCs are secured by the value of your home. The amount of equity that you have directly impacts the amount that you can borrow. More equity means a higher borrowing limit.

Interest Rates

An advantage to securing a home equity loans and a HELOCs with your home is that it greatly reduces the lender’s risk. That means these loans have some of the lowest rates of any type of debt.

One important difference between the two is that HELOCs tend to have variable interest rates. That means the rate can change over time based on market rates. With a home equity loan, you usually have the choice of variable or fixed rates.

Access to Funds

An important difference between HELOCs and home equity loans is when you can access funds.

HELOCs let you draw funds multiple times as the need arises. That makes them ideal for people who might need cash quickly or who need to withdraw cash multiple times.

Home equity loans give a one-time distribution of cash, which makes them better for one-time expenses such as paying for a home renovation.

Fees

Both HELOCs and home equity loans include fees. Both loans usually carry origination fees and closing costs that you pay upfront. However, only HELOCs have annual maintenance fees that lenders charge to keep the line of credit open. Home equity loans don’t tend to have ongoing fees to pay.

How To Get a HELOC

If you think that a HELOC is right for you, here’s how you can find one.

Compare Lenders

The first thing to do when you’re looking for any type of loan is to shop around and compare different lenders. Each lender will offer different rates, fees, and other features for their loans. If you take the time to look at a few different options, you might find one that’s offering a much better deal.

Gather Your Information

Before applying, make sure you have all the necessary documents ready. You’ll need things like:

• Personal identification, including Social Security number
• Income information and employment history
• Home documents, including a recent mortgage statement
• Proof of homeowners’ insurance
• Property tax bills
• Information about other outstanding debts
• A list of your assets and account statements

Submit an Application

Once you’re ready, you can submit an application for a HELOC. Provide all the requested documents and work with your lender to verify the details of your home value, employment and income history, and answer any other questions they might have.

Appraisal

If your lender approves you for a HELOC, they’ll want to confirm that your home is worth enough to properly secure the loan. They’ll order an appraisal of your home to determine its value. The result of this appraisal can play a role in determining how much you can borrow with your HELOC.

Closing

If the appraisal comes back and shows you have sufficient equity, the next step is closing. You’ll sign all of the loan documents and paperwork. You will have three days to cancel the HELOC if you change your mind.

Use Your Line of Credit

After the three-day waiting period, your HELOC is officially open and you can start accessing the line of credit. You will have a draw period—typically 10 years—from which to access the funds as needed. During this time, you will start making monthly payments to include a portion of the principal (the amount you borrow) plus accrued interest.

Alternatives to HELOCs

HELOCs are one option for homeowners looking to get cash out of their homes, but there are alternatives to consider.

Home Equity Loan

A home equity loan provides a one-time distribution of funds that homeowners can use for things like paying a large medical bill, funding home improvement, or consolidating debt.

Home equity loans are typically fixed-rate loans and are ideal for one-time expenses. They’re not the best choice for situations where you might need to withdraw funds multiple times.

Cash Out Refinance

A cash-out refinance lets you refinance your entire mortgage and take some of the equity out of your home as cash. For example, if you owe $200,000 on your mortgage and have a home worth $300,000, you could refinance your mortgage with a new, $250,000 loan to replace the existing loan and get $50,000 in cash.

Like home equity loans, cash-out refinances are best for one-time expenses because they offer a one-time payout of funds. However, because they replace your entire mortgage, they tend to be most useful when you can refinance to a lower rate or want to trade an adjustable-rate mortgage for a fixed-rate one.

Reverse Mortgage

A reverse mortgage lets homeowners age 62 or older turn their home equity into a source of income during retirement. These loans are far more complex than HELOCs and other equity-based loans, so it’s important to do your due diligence before getting one.

In general, they can be a good choice for older homeowners who need to supplement their income but aren’t useful for many other situations.

Frequently Asked Questions (FAQs)

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