Are you in need of some extra cash for a home improvement project or to help pay for your child’s college tuition? Well then, a HELOC might be a useful financial option. However, as with any financial option, it comes with its pros and cons. Let’s outline what a HELOC is and what you should be aware of before you decide to apply for one.
What Is A HELOC?
HELOC stands for home-equity line of credit. This is not to be confused with a home-equity loan, which differs in two distinct ways. A home-equity loan is a lump sum of money that has a fixed interest rate in comparison to a home-equity line of credit, which does not have a fixed interest rate. The latter is more like a credit card, and depending on your own situation, could be the better option.
Do You Know How Much You Need?
If you know the exact amount of money you need for say tuition or some other expense, then a home-equity loan may be the best option. The reason for this is that they are more fit to handle a one-time expense and come with a fixed interest rate that you do not have to worry about changing over time. If you expect to take more than 5 years to pay off the debt, then you probably want the safety of fixed payments and a fixed interest rate according to “Ask these 5 questions before borrowing against your home’s equity.”
What If Its for Something Else Such as Home Improvement?
Perhaps you have decided to take on a home improvement project to not only increase the value of your home but make the space more useful for you while you own the property. Before borrowing money for such a project, you should consider if the home improvement project will really be worth it. Depending on what sort of addition you intend to make to your home, this could be a worthwhile investment.
In this case, taking out a HELOC would be more advantageous for you may not know exactly how much money you need to borrow according to “5 Questions to Ask Before Applying for a HELOC.” Say you get approved for a credit line of $50,000 and you only end up using $15,000, you will only have to pay back the $15,000 that you used. However, the downside is that the interest rate will be variable, and as such, it is highly recommended that you have the ability to pay it off in five years or less.
Look into Other Options
Before committing to a HELOC or a home-equity loan, you should explore other options for financing. The dangers that come with borrowing against your home’s equity is that if you are unable to pay back the money you borrow, the lender can start foreclosure proceedings against you. You could maybe use some of your savings to pay for the home improvement or look at other forms of credit. Ultimately, if there is an option out there that doesn’t require you to go into more debt, that is worth looking at before making your final decision.