Everything You Need To Know About HELOCs


HELOCs For Times Of Crisis

In an economic crisis, you may lose your job, or your stock market portfolio; your retirement account balance could also dwindle. In these situations, you may rapidly deplete your savings. But if you have arranged for a home equity line of credit (HELOC), it can come to your financial rescue. An extended line of credit based on your home equity can be a dependable asset when cash runs low.

How a HELOC Works

If you have a large amount of accumulated equity, then a HELOC offers credit options with relatively low and affordable monthly payments that can be repaid over a long time frame. Unlike loans that only pay in one lump sum, a HELOC offers the kind of flexibility you might expect with a credit card. As long as you remain within your credit limit and repay the minimum monthly payment on time, you can borrow whenever you want, and as much as you want. You only pay interest on money you borrow, and it may be tax deductible, especially if you use the HELOC funds for home improvements. SEE ALSO: How HELOCs Hurt Refinancing

They Can Be Risky Business

HELOCs generally have low closing costs, but some banks may require setup fees and a home appraisal. If home values rise, the bank may be willing to increase your line of credit. Conversely, if home values plummet, your line of credit may be lowered or frozen. The biggest potential risk with HELOCs is that if you fail to make your monthly payments, the lender can file for foreclosure. That’s because your property is the collateral on the loan. Although a HELOC is an easy way to obtain cash without a complicated application or underwriting process, defaulting can leave you homeless. SEE ALSO:Is Your Property At Risk With A HELOC? 

They Can Be Great Plan Bs

Keeping an open line of credit handy is a great “plan B” for tough economic times because you can turn to it when other sources of income are strained or spent. As long as you have sufficient home equity, your HELOC can provide a steady stream of cash on demand. You can access it conveniently, too, on an as-needed basis; it’s almost as simple as using an ATM card or writing a check. A major advantage of HELOC loans is that the interest rates are usually much more affordable than other kinds of loans, such as credit cards. In fact, many people use their HELOC as a debt-consolidation loan. If you pay off all the other expensive high-interest rate loans with the HELOC, you can end up with one single monthly payment that’s easier to budget and manage, and much less costly.
Date of original publication:
Updated on: November 10, 2015

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