Home Equity Line of Credit (HELOC) can be a great way to make cash available using the equity you have built up on your home. This can be used for anything from college tuition to home renovations. This article shares six quick tips on how to shop for and manage a HELOC for home improvements and other uses.
Shop around.
Comparison shop to get the best rate. Often, people go with the same lender that has their home mortgage, but this isn’t necessary. Make sure you get a sampling of enough lenders and do an apples to apples comparison to consider interest rates and lending fees.
Ask about the margin.
As noted in the first one, it is important to make sure you are comparing apples to apples when determining which lender to go with. If you’re offered a rate that’s lower than the competition, it’s may just be an introductory rate, so ask about the lender’s margin. For example, if the introductory rate is 3.5 percent and your lender’s margin is 2 percent, your final interest rate will be 5.5 percent.
Consider a conversion clause.
Some HELOCs allow you to convert a variable interest rate to a fixed rate, usually during the draw period (5-10 years). Inquire about these as options that allow you to enjoy the low rate from a variable interest rate but ultimately secure more predictability in the rate over time.
Watch out for balloon payments.
Balloon payments mean that you must pay the balance in full when the draw period is up. Do not choose this option unless you have the financial means to handle it. Proceed with caution if you are “expecting” to have the financial means down the road as circumstances can change but your loan commitment doesn’t.
Create a family plan. Decide what the money will be used for and who will handle the funds. Keep in mind, you can lose your home if the HELOC is not handled properly. Create a payback plan. Come up with a reasonable plan for how the loan will be paid back.
Frequently Asked Questions
What is a HELOC?
A home equity line of credit that lets you borrow against your home’s equity as needed.
Is a HELOC good for home improvements?
It can be, especially for projects that add value or are completed in stages.
What are the risks of a HELOC?
Variable rates and the fact that your home secures the debt.
Related reading: Use lender money for home renovations and When Is It Time to Repipe Your Home?
