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The Many Faces of a HELOC

A HELOC is a home equity line of credit, which is basically a big credit card with mortgage tax deductions where you can borrow, pay down and repeat. They are versatile and useful lines of credit, allowing borrowers to use the money for a multitude of reasons. Sometimes, when a person needs to borrow larger sums of money, a HELOC might be the best choice. HELOCs are commonly used as home improvement loans, for investment properties, vacations, debt consolidation, college tuition, car loans, business loans, etc. They offer low interest rates and allow borrowers to pay on demand – only what is used and the interest.

The collateral on a HELOC is the equity in the borrower’s house. It differs from a home equity loan because the borrower does not receive all the money up front, but has access to it during a specific draw period – usually between five and ten years with a pay period of ten to 25 years.

When a HELOC is above a certain monetary amount, the FICO credit scoring software is supposed to treat it as a mortgage. But often times it shows up as revolving credit and not a mortgage. Because of this, HELOCs are often seen as big credit cards and need to be treated as such. You would not want to max out your credit card, so do not max out your HELOC either because it could cause your FICO score to severely drop.

There are several strategies you can use to tackle the HELOC, one being as follows. Let’s say you need $50,000, but can attain a $200,000 HELOC because you have enough equity. Apply for the $200,000 HELOC and only use $50,000 of your balance. Then you are only at 25% debt ratio on that particular account and you do not have to pay what you do not use. If you were to take only a $50,000 HELOC and use all of it, it would be as if you had a $50,000 maxed out credit card. This would cause your credit score to suffer tremendously.

HELOCs more recently have been used for emergency funds. However, lenders might charge a fee to keep that line of credit open. HELOC's generally have adjustable interest rates. Keeping a HELOC open for a long period of time as an emergency fund can be a great idea, but understand that your interest rate can fluctuate significantly.

HELOCs are a great source of flexible credit for large sums. There are various strategies to use with HELOCs as mentioned above. Look into all options when searching for a HELOC, so you can find out how its many faces can benefit you.

Brought to you by Financial Solution Services' Research & Development Team