Applying for a HELOC can be very daunting more so if you have no idea whether going for one would be for your best interest when trying to finance a big project.
Financing big projects by using your home equity does make a lot of sense if the benefits you will get will outweigh the fees you’ll have to pay and the risks you’ll take. A HELOC may pose fewer issues for you compared to a second mortgage if you really want to use your home equity.
Why Get a HELOC
A HELOC allows a homeowner to access home equity by borrowing against it. Upon HELOC application, the lender will set a borrowing limit (related to the value of the home equity) from which the homeowner can borrow as little or as much as needed just like a credit card with a set limit as well. Just like with a business line of credit or a credit card, you only pay interest on the money you withdraw. You can also keep borrowing although you still owe money as long as you haven’t reached the credit limit yet.
A HELOC is different from a home equity loan because the lender gives the borrowed amount in a lump sum for the latter. You will also be required to pay a predetermined sum on a monthly basis with a home equity loan until the whole loan is paid off. Simply put, a HELOC is much friendlier on your wallet and more flexible for your needs.
A HELOC requires that you have enough equity in your home. Lenders would often require that you maintain 10-20% equity in your financed home even after taking a HELOC. Other requirements include a steady employment, a good credit score, and having proof of income. Note that some lenders may be more lenient than others.
Does a HELOC Make Sense for You?
If you’re going to have multiple significant expenses over the course of the next few years, then getting a HELOC makes more sense than getting a standard home equity loan. Having multiple significant expenses mean that you’ll be facing a revolving bill, so it only makes sense that you get a loan that affords you a revolving line of credit. An example of this is paying for college tuition. You get a HELOC to pay tuition at the start of the semester, pay little by little for the next few months, and borrow again from the amount you paid to fund the next semester.
Questions you must consider before getting a HELOC include:
- Is a HELOC a better option than just saving for the expense?
- Can you afford paying interest should it skyrocket in the worst-case-scenario?
- How do you plan to pay the debt?
- Do you think you can handle not using the money for unimportant reasons?
- Are you sure that you fully understand the terms and conditions?
Remember that a HELOC is a loan that uses your home as collateral. You need to be sure that you’re able to pay and that you’re considering all options as well as possible scenarios.