How to Find the Best Home Equity Lines of Credit (HELOC)
Home equity credit lines offer the same benefits and advantages of home equity loans:
- Avoid refinancing. For most homeowners with already low interest rates or who have paid into their current mortgage loan for over six (6) years, a refinance of their existing first mortgage loan may not be a smart idea. A home equity line of credit can help them avoid the hassle and huge potential losses involved with a wrong refinance.
- A cheap refinance loan alternative. A standard refinance loan of your existing first mortgage loan can cost thousands of dollars, which closing costs reaching up to 2.5% of your much larger loan amount. A home equity line of credit will still have closing costs, but they are usually well below $1,000 for the whole thing.
- Faster approvals. You’ll still need to qualify for the home equity credit line, with an examination of your ability to repay the debt (employment and income), history of repaying obligations (credit report scores) and the collateral for the loan (property’s appraised market value). But because of the smaller sizes of home equity lines of credit, they tend to get approval more quickly than bigger refinance loans.
How HELOCs Work
However, the HELOC’s special feature offers an important benefit that home equity loans do not: your home equity line of credit can cost you much less in the long run. The reason for this is that your equity credit line works much like a credit card — except that it gives you checks you can use to draw against your credit line.
You can also pay back any portion of the principal you want, at any time during the draw period. So your credit line’s principal balance can fluctuate depending on how much you take out and (optionally) put back in.
The great thing about this feature of the home equity credit line is that you only pay interest on the balance you’re maintaining. If you never use it, you’ll never have to pay any interest charges. If you do use it, your monthly payments will be calculated against the outstanding balance in your credit line.
A Crucial Financial Planning Tool for Homeowners
Perhaps the most overlooked application of the HELOC is as a financial planning tool for homeowners.
Planning contingencies in case of emergencies is not only smart. It’s a necessity in our struggling economy and challenging financial lives. HELOCs offer homeowners an incredible tool to handle the most pressing emergency situations… when you need cash fast.
Yes, you can use your credit cards for most emergencies. But the interest rates they charge and the hit that high credit card balances can put on your credit scores can be high.
Yes, you can also tap into your 401ks and maybe refinance your mortgage loan to access the equity in your property. But both options take time and will cost a lot of money.
A home equity line of credit, established before a financial crisis or emergency occurs gives you a faster and cheaper source of funds. If your property has equity, why not get a home equity line of credit against it.
Again, if you never use the credit line, you’ll never have to pay any interest on it. But if the need ever arises, you can quickly draw on your HELOC and pay interest on the balance. More importantly, the interest rate on your home equity credit line is much lower than credit cards — and the interest charges may be tax deductible (unlike credit cards).
HELOCs Turn into Home Equity Loans
Even though home equity lines of credit are very flexible, they do have a time limit. Actually, they have two time limits or terms:
- Draw period. Your credit line only lasts as long as your draw period. During this period, which normally runs from 5 to 10 years, you can draw from your home equity line of credit as often as you wish, as long as you have room in your credit line.
- Fixed payment period. After the end of the draw period, most HELOCs are converted into a home equity loan. You then have to start making monthly payments on your newly created home equity loan, and the payments are based on the initial balance, loan term (usually 10 to 15 years) and the interest rate.
If you want to extend your draw period and keep your HELOC a credit line, just speak to your HELOC lender to modify the draw period or refinance into a new home equity line of credit.
Shopping for the Best Home Equity Line of Credit
To find the best HELOC program for your situation and property, you would actually follow the same money-saving procedures discussed in the home equity loan section.
