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The Ultimate Guide to Home Equity Lines of Credit (HELOC)

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Life can be expensive, and credit cards can be a costly way to pay for things when you don’t have the cash saved up. Another option to consider is using a home equity line of credit, also known as a HELOC, to pay for that home remodel, wedding expense or college tuition.

A HELOC is a revolving line of credit backed by the equity in your home. That means you can borrow up to a limit, pay it back, and then borrow again if the need arises. You can find the amount of equity you have in your home by subtracting your home’s market value from any mortgage balance you have. For example, if your mortgage balance is $100,000 and your home’s market value is $400,000, you have $300,000 in equity. Most financial institutions will let you borrow up to 80% of the home’s equity.

Terms will vary among borrowers; however, a home equity line generally allows a period when you can draw on the loan — borrow — and then a period when no more borrowing is permitted, and you must repay the loan. For example, you may be allowed to draw on the funds for ten years and then the loan will freeze. Then you will have up to 15 years to pay the balance back.

Applying for a HELOC is similar to applying for other loans. Lenders look for a good credit score, low debt-to-income ratios, job security, and a history of on-time payments. While a HELOC often requires an appraisal, the process is generally not as drawn out as your mortgage loan.

How can a HELOC be used?

You can use a HELOC for many different types of purchases. A common reason to borrow against your home’s equity is to cover a major remodel. A recent report pegged the median cost of kitchen remodels at nearly $35,000. Many families don’t have that kind of cash in the bank, so a loan is a great option. Interest rates on a HELOC tend to be relatively low, often comparable to a first mortgage. While credit cards and even personal loans might require high interest charges, a home equity line can have an interest rate that is relatively low in comparison. Plus, you are only paying interest on the funds you use.
Another common reason to use a HELOC is for an emergency life expense. Homeownership can be expensive, and when you need a new roof or your A/C goes kaput, you need a replacement fast. A HELOC gives you access to quick funds that won’t cost you thousands in high interest.

HELOCs can be used in other ways too. Small business owners may find they’re an affordable source of extra funds. Parents may consider using a home equity line to pay for college or a wedding. Whatever the reason, HELOCs can be an affordable and flexible way to finance major life events or unexpected expenses.

Flexibility is in your hands

Power Financial Credit Union understands that life can be expensive and families need affordable solutions for home improvements and unexpected expenses. That’s why we offer competitive interest rates, home equity lines of up to 80% of your home’s value, and repayment periods of up to 15 years. We may even cover up to $1,000 of your closing costs.

If you've been thinking about applying for a home equity line of credit you should know it can be easy and hassle-free. Do more with your money — drop by your local Power Financial Credit Union branch or give us a call to discuss your options with one of our experienced loan experts.