August 21, 2020

What is a HELOC?

HELOC (pronounced “he-lock”) is an acronym for Home Equity Line oCredit. A HELOC gives you access to credit that is secured by the equity you have in your home.

Why Get a HELOC? What Are the Benefits?

HELOCs are a popular option for homeowners, especially for financing home-improvement projects. Not all HELOCs are the same, but they usually feature flexible repayment options, offer better rates than unsecured loans or credit cards, and bring all the benefits of a line of credit.

How Could I Use a HELOC?

There are a lot of ways to use a HELOC. Here are a few of the most popular ways people have used their HELOCs:

  • Financing home improvement. This is the most common reason given for using a HELOC. It makes sense. Improvements to your home increase its value, so home improvements are like a low-risk investment. Getting a HELOC uses the value of your equity to help finance these improvements and increase the overall value of your home or property.
  • Debt consolidation. If you have credit card debt, car payments, or other high-interest loans, using a HELOC to pay them off could help you save money on interest or monthly payments. Because they are secured against your home’s equity, HELOCs often offer a lower interest rate than unsecured loans or standard credit cards. You may also benefit from the flexible repayment terms of HELOCs. Some offer interest-only payments during the draw period or other repayment options. Consult with your financial advisor and read the terms carefully to determine the best product or strategy for you.
  • Major purchases. Since a HELOC is a line of credit, you can use it to pay for almost anything. People have used HELOCs to pay for weddings, starting families, once-in-a-lifetime vacations, medical expenses, and many more things. Always consult with a financial advisor and be sure you fully understand the terms, risks, and repayment requirements before using any loan product.
  • Covering emergency expenses. Most financial experts recommend keeping an emergency fund that could cover you for between six months and a year if you lost your job. That’s good advice. But if you don’t have the cash on hand, a HELOC could help cover medical expenses, car repairs and other unexpected costs. While an emergency savings account is the best way to be prepared, opening a HELOC could give you peace of mind in the mean time.

HELOC vs. Home Equity Loan?

While both a HELOCs and Home Equity loans are secured by your home equity, HELOCs have some specific benefits

  • With HELOCs, you only pay for the credit you use. You can draw funds any time during the draw period and make repayments as you go. Traditional home equity loans are paid to you up front in a lump sum, so you must begin paying on the full amount of the loan from the start.
  • HELOCs offer flexible repayment options. HELOCs often allow for interest-only payments during the draw period (usually around 10 years). This can give you more time and budget flexibility than traditional home equity loans.
  • HELOCs can help cover you during emergencies. Because they are so flexible and often have no minimum draw amount, HELOCs can be an easy way to add credit to your financial life that can be used in the event of an emergency. If your emergency savings account is looking a little light, a HELOC could give you peace of mind in the event of surprise medical expenses, unexpected home repairs, or other costly problems.

The benefits of Home Equity loans mostly come from their predictability. Home equity loans are usually lump-sum, fixed-interest-rate loans with straightforward repayment terms. If you know exactly how much your expenses will be and are certain you can repay on a fixed schedule, a home equity loan may be right for you.

No matter what you choose, it’s important to always bear in mind that HELOCs and home equity loans are not risk-free. You’re securing your purchases with your home. If you don’t pay your loans, you could face serious consequences, like losing your house or damaging your credit. As with all credit or loan products, it’s best to do your research, speak to a financial advisor, and make a plan for repaying before you apply.

This article is for educational purposes only. Tulsa FCU makes no representations as to the accuracy, completeness, or specific suitability of any information presented. Information provided should not be relied on or interpreted as legal, tax or financial advice. Nor does the information directly relate to our products and/or services terms and conditions.