What is a HELOC?

A home equity line of credit (HELOC) is an arrangement in which a lender allows you to borrow money up to a certain amount, but with flexible repayment terms and adjustable interest rates within certain limits. The borrower can request money or simply use it for pre-approved purposes if needed. The HELOC acts as an open-ended credit line that you can pay back at any time without incurring a penalty fee.

Once the loan is paid off, you will not be able to use the Heloc again until it has been re-approved, which is usually possible with a credit check and income verification. If you are applying for a HELOC, you will likely be required to provide documentation that shows how much the value of your home has appreciated since you purchased it.

A Five-Letter Word that can have Many Consequences

The decision to get a HELOC is not one quickly made. Before applying for the line of credit, you should be aware of how it works and what your responsibilities are. You must remember that once you have a HELOC, you must be responsible enough to pay the balance in full every month or end up paying a lot in interest.

HELOCs can free up money for emergencies, home renovations and other major expenses when used responsibly. However, if not managed properly, HELOCs can quickly become expensive debts that increase your monthly bills and take away the flexibility they once provided.

How Do HELOCs Work?

A HELOC is typically set up for 10 years; however, the repayment period can continue until the borrower's death or as late as 20 years. The interest rate might change depending on how much the value of the home has increased. It is not based on your credit score, but rather on your housing equity.

When you are approved for a HELOC, you will be given access to funds in increments that can range from $5,000 to $100,000 or more. Only a percentage of the loan amount will be accessible immediately and the rest will be available at a later date. Each draw period (when you access your HELOC funds) has its own interest rate that can vary from one to six months or more, depending on the lender.

How Much Should I Borrow?

The best way to determine how much you should borrow is to first determine how much you can afford to pay back every month. Once you have that figured out, it's time to look at your budget and see what other expenses are not included in that monthly payment.

Conclusion

A HELOC is not the right financial tool for everyone, but, when used responsibly, it can be a very helpful source of funds. Before you apply for one, consider your needs carefully. If you use one irresponsibly, you could find yourself in major debt very quickly. But if this loan will help save your credit score and get you out of a bind, it could be worth the risk.