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Home equity lines of credit, or HELOCs, let you convert the equity in your home to a line of credit you can draw on. HELOC funds can be used to cover emergencies, large expenses, or even experiences, such as a family vacation.
Discover how a home equity line of credit works, as well as the pros and cons, so you can make an educated financial choice for your family.
A HELOC is a revolving credit account similar to a credit card. However, it’s secured by equity in your home.Â
A HELOC is a form of second mortgage. If you have equity in your home and meet other requirements, such as having a good credit score and income high enough, you may be able to get approved for a HELOC. It’s a line of credit, which means you can draw on it as you need. Since it’s revolving, you pay back what you borrow and then you can use the funds again—similar to how you might use a credit card.
You don’t need a down payment to take out a HELOC. You do, however, need to meet the requirements of your lender. Those vary from lender to lender, but common requirements can include the following:
Here’s a more detailed breakdown of how HELOCs work.
A home equity line of credit is not the same as a home equity loan. Here’s a breakdown of ways they’re the same and how they’re different.
Home Equity Line of Credit | Home Equity Loan |
Secured by equity in your home | Secured by equity in your home |
Acts as a second mortgage | Acts as a second mortgage |
Funds are available as you need them during the draw period | Funds are provided as a single lump-sum payment |
You make a monthly payment and can reborrow what you pay back during the draw period | You make a monthly payment but cannot reborrow what you pay back |
Interest is typically adjustable, so it may fluctuate over time | Interest may be fixed or adjustable, depending on the terms of the loan |
Is treated as revolving credit | Is treated as an installment loan |
Home equity lines of credit come with benefits and disadvantages. It’s important to understand both to decide if getting a HELOC is a good financial move for you. Review these pros and cons and discuss your options with a financial advisor.
The coronavirus pandemic and the subsequent economic uncertainties have caused some banks to discontinue offering HELOCs, at least temporarily. Banks that stopped accepting HELOC applications include JP Morgan Chase, Wells Fargo, and Citi. While many larger banks have put a hold on HELOCs, home equity lines of credit may still be an option for borrowers working with smaller banks or other lenders.
HELOCs have a lot of benefits, but they aren’t right for everyone. And if you don’t have equity in a home, they aren’t even an option. Here are some alternatives to consider.
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HELOCs are a great financial tool, but they’re just one option. When taking on debt, make sure you consider all your options so you can make the best decision for yourself and your family. Review your credit report and credit score regularly so you know your financial standing.
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