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What is a HELOC?


A HELOC, or home equity line of credit, is a great tool that allows homeowners to borrow against the equity they have built up in their home, and use the proceeds to help cover expenses. 

A HELOC resembles a second mortgage, but there are differences. HELOCs allow homeowners to borrow money and the collateral for the loan is the borrower’s equity in his/her home. Unlike a home loan, a HELOC has revolving credit like a credit card. HELOCs act like credit cards in the sense that they have a credit limit rather than a set dollar amount like other loans.  Homeowners are then able to borrow against this credit limit, pay all or part of their balance, and borrow again up to the credit limit.

With a line of credit, you only pay interest on the money drawn from your line, and the payments are based accordingly.  Depending on your HELOC terms, the draw period is usually the first 5 or 10 years.  During the draw period, you can borrow from the HELOC and your minimum monthly payments are interest only.  Following the draw period is the payment period.  A typical repayment period is about 20 years and your payments will include your principal and interest.

Here are some common questions about HELOCs:

What are HELOCs used for?
A HELOC can be used to pay for major repairs or projects in your home, vacations, debt consolidation, and college education expenses.  When using a HELOC for home repairs and upgrades you are able to build the wealth of your home and increase your home’s value which can come in handy if you plan to sell your home at any point in the future.

How do I get a HELOC?
To be eligible for a HELOC you must have equity in your home, fairly good credit, and enough income to make monthly payments on the amount you borrow.  You can apply for HELOCs at your credit union or through a mortgage lender.

What advantages are there to using a HELOC versus other loans?
HELOCs tend to come with lower interest rates than other loans and forms of debt.  You also do not have to worry about closing costs when taking out a HELOC.  If you have paid off your balance on the line of credit, you do not have to worry about a monthly payment.  As a bonus, the interest on your HELOC may be tax-deductible.

What are the risks involved with HELOCs?
If you fail to repay the HELOC, the lender may foreclose on your house.  However, if you are responsible and can make the payments, you will not have to worry about foreclosure.

A CES home equity professionals can help you decide if a HELOC is right for your situation and help with crunching the numbers. Call 1-888-397-1136 or stop in to you local CES location to get more information!

|Federally Insured by NCUA|

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