Whether you need to pay for home renovations, buy a house, purchase a car or pay for school, borrowing money is something most of us will do at one time or another. While there are several ways to borrow money, one of the best options if you own a home that has some equity is a home equity line of credit (HELOC).
This will act similar to a credit card, as it is a revolving line of credit that allows you to borrow money as you need it to pay for some of life’s many costs. They are often used for renovations, to handle emergencies, and even to consolidate your debts with higher interest rates.
But why is this such a common and popular way for people to borrow money? Keep reading to learn more about the benefits of a HELOC and why getting one might be right for you.
It is Relatively Easy to Understand
The first benefit of a HELOC is that they are generally simple to understand. Many borrowing methods and financial topics can be confusing, but if you can understand how a credit card works, you can understand a HELOC.
The amount of your HELOC will almost directly depend on how much equity you have in the home. Once you are approved for a certain amount, you can borrow up to that amount, and then pay it back to use it again. As you can see, it works very similarly to a credit card in that respect.
While simple to understand, it is still a good idea to educate yourself on things like how they work and the process to get one. Check out SCCU, which is a good resource for doing just that.
Interest Rates are Low
Another reason a HELOC might be for you is that interest rates are low. When borrowing money, the interest rate is one of the biggest concerns people have, and for good reason. A larger interest rate equals a higher amount you will need to repay over time.
Even a single percentage point difference in interest rate can equal hundreds or thousands of dollars in some cases. The lower your rate, the more affordable borrowing will be. While the interest rates are great, it is important to know that these lines of credits are secured, too.
If you cannot make your payments when you need them, you could risk losing your home or your equity. As a result, only borrow what you need and can afford to pay back. We know that the low rates can be tempting, but it is important not to give in and always use HELOCs responsibly.
Only Pay Interest on What You Borrow
When you take out a loan, you are responsible for paying interest on the entire amount you borrowed, no matter how much of it you actually used. But with a HELOC, you only pay interest on what you borrow. So if you only use 10% of the available limit, your interest paid will be minuscule compared to if you got a loan instead of a HELOC.
This keeps your overall cost of borrowing low and stops interest from eating away at your bank account. You can also pay back what you borrow at any time to avoid paying any interest at all if you get the balance back to zero.
HELOCs are Flexible
The flexibility of a HELOC is another reason they are so popular. They allow you to borrow when you need, and pay back when it makes sense to you (other than interest, which will generally need to be paid monthly). This provides a ton of freedom that a standard loan simply cannot.
The flexibility also ensures you are always covered in the case of an emergency, which is a nice touch. The flexibility also extends to what you can use a HELOC for. There are generally no rules and the money can be used for whatever you want.
Of course, be sure to keep track of all you spend this money on, and it should generally be reserved for emergencies or things like home renovations and debt consolidation. Getting a HELOC to invest, but a new home theater or travel is generally a bad idea.
While flexibility is a strong suit of these lines of credit, there will eventually come a time where they become a little more structured. This is because HELOCs have two periods, the draw period and the repayment period. During the draw period, you can borrow and repay up to the limit as many times as you want without a problem.
You can pay back everything, but you are only responsible for paying back the interest on the amount you borrow. However, during the repayment period, you need to pay back everything until your balance is zero.
This is done via more regular payments, similar to a standard loan. Of course, if your balance is already zero at the end of the draw period, the repayment period simply won’t take place and the account can close.
They Can Help You Increase Your Credit Score
One of the most underrated, yet helpful, benefits of a HELOC is that they can help you build your credit. Because they are relatively easy to get, simple to understand and come with low rates, HELOCs provide a safe way to build your credit by borrowing small amounts and repaying them quickly.
A higher credit score can make it easier to borrow money, easier to get a vehicle, easier to rent an apartment and can make borrowing money much more affordable. Better credit means you are a less risky borrower, and many lenders will give you more favorable rates and terms.
We hope this article has been able to help you see the benefits that a HELOC can have for many people in need of some additional cash. If you own a home and need to borrow some money, be sure to consider this option.