Loans

Four Tips to Assess if a HELOC Fits Your Financial Needs

When looking to borrow money, some homeowners might not be aware of an asset right at their fingertips: the equity in their home. As of June 2024, the average credit card rate is approximately 24% and the rate on a home equity line of credit (HELOC) is a fraction of that. Tapping into a HELOC is a great way to fund a wide range of financial needs. Read on to explore if a HELOC might be right for your financial needs and goals.

1. Learn what makes a HELOC unique: Understanding what a HELOC is and how it’s different from other ways to borrow money will help you decide if a HELOC is right for you.

A HELOC is essentially a line of credit secured by your home. Like a credit card, a HELOC offers a revolving line of credit you can pull from as needed during the draw period (which is usually 10 years) up to your credit limit. During the draw period, you will only be required to pay the interest that accrues on the loan, or you can choose to make additional payments.  Unlike a credit card, after the draw period is over, you’ll start the repayment period, which also typically lasts 10 years, to pay off the remaining balance plus interest.

2. Understand what type of interest rate is best for you: Knowing how your loan’s interest rate will affect your long-term financial goals is important.

While a variable rate might offer a lower starting interest rate, it’s good to be aware that your interest rate could change over time based on U.S. economic trends. With fixed rates, you’ll be able to plan for predictable monthly payments and protect yourself against rate fluctuations.

Most HELOCs will only charge variable interest rates; however, some lenders, including Bellco Credit Union, also offer the option to take a draw with a fixed interest rate and repayment period, which may not exceed the remaining term on the HELOC. You should speak to the lender to understand how these fixed rate draws work.  Additionally, a HELOC often has a lower interest rate than some other types of loans (e.g., high-interest credit cards), and the interest paid may be tax deductible.*

3. Review HELOC qualification terms: You must meet certain qualifications to get a HELOC, including having sufficient equity in your home.

The total amount of debt secured by your home must be less than the current market value of your home to qualify for a HELOC. Typically, your total borrowing, including the amount you owe on any first mortgage and other debt secured by your house, can be up to 85% of your home’s value. Lenders also evaluate your credit score and credit history, along with other factors normally considered during a mortgage approval process such as employment verification, employment history, monthly income and current debt.

4. Think outside the box when considering a HELOC: In addition to home improvements, there are a variety of ways a HELOC can be utilized.

  • Pay off higher interest debt: Consolidate high-interest debt, such as credit card balances or student loans, into one lower-interest loan.
  • Fund business expenses: If you’re starting a new business or growing an existing one, a HELOC can give you access to funds on a revolving basis to start your business and keep it running.
  • Supplement an emergency fund: If you have unexpected medical bills, urgent repairs or lose your job, a HELOC can act as a layer of security in addition to an emergency fund to help manage sudden, expensive events.
  • Pay for a wedding or life event: If upcoming plans require a larger lump sum payment, consider a HELOC so you can pay it off over time at a more competitive rate.
  • Fund a big expense you’d put on a credit card: If you’re considering making a major purchase with your credit card, such as going on a big vacation or buying a major home appliance, look into a HELOC. It could ultimately cost less because credit card rates can be double, or even triple, the typical HELOC rates.

Learn more about your options through Bellco with Home Equity ChoiceLine.  

*Please speak to a tax consultant about the deductibility of any payments made towards your HELOC.

Bellco is an Equal Housing Opportunity Lender.