Getting a home equity line of credit

There are more advantages to growing home equity besides personal pride in owning a property with appreciating value. If you're in need of additional funds in your checking account, you can use that appreciation to open a home equity line of credit, or HELOC.

What is a HELOC?
Like home equity loans, these lines of credit are granted based on your property having accrued equity over the years. However, instead of a lump sum loan, HELOCs are revolving lines of credit similar to a credit card. The amount that you are given functions as a credit limit, and you can borrow against that limit at any time. These funds can be used via checks associated with the account.

How much money can you borrow?
Your HELOC limit and terms are determined by several factors, including your outstanding debt and creditworthiness. Additionally, we will factor in the appraised value of your home and the outstanding balance of your home loan. Sometimes there is also a draw period, which determines how long you can utilize your line of credit. Once that period expires, you may be able to renew the HELOC and continue to access the funds.

The repayment terms of your line of credit could change after the draw period ends. For instance, you could be required to pay a lump sum due at the end of the loan, which is known as a balloon payment. 

What are the fees associated with HELOCs?
As when you apply for and receive mortgages, there are closing costs associated with HELOCs. These include fees for attorneys, the title search, the application and the appraisal fees, as well as points. Consider these expenses when deciding whether to open a HELOC, especially if you plan to pay for them with your new line of credit.

What is the interest like for HELOCs?
The annual percentage rate for this line of credit does not consider points and financing charges. Instead, it only factors in the periodic interest rate. You could have a variable rate, which goes up or down during your repayment period based on a market index. Keep in mind that a spike in rates could increase your payments with a variable rate. Speak with one of our bankers to find out the specific terms you are qualified for. 

One benefit of HELOCs is that interest you pay on the loan is tax deductible. The only stipulations are that you can't deduct more than the home's fair market value and you can only deduct up to $100,000 if the purpose of the loan is not home improvements or purchase. 

When should you get a HELOC?
If you're going to need access to additional cash but don't necessarily require a large amount at once, a HELOC can be the right choice for you. You can use a HELOC to make smaller payments on a large purchase over time, which is advantageous if you're paying for a single purchase in installments. One example would be paying a contractor for home renovations, as there is typically an upfront down payment and amounts to be paid along the project timeline.

Lines of credit can be more flexible than loans because you get access to money when you need it. Additionally, they give you the advantage of paying interest on a lower principal if you only make a few small purchases.

Before opening a HELOC, consider that your home functions as collateral. For this reason, many homeowners only use this option for major expenses.

For more information on home loans, contact Landmark Bank.

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