A home equity line of credit can be a great way to pay for a big home improvement project, college tuition, or other large expenses, but you have to place your property as collateral in order to get one. Here’s what you need to know about the pros and cons of home equity lines of credit, how they work, and when to consider one as an option.
How Does a Home Equity Line of Credit Work?
A home equity line of credit (also called a HELOC) is a line of credit that’s secured by your home. Unlike a loan (which gives you a lump sum of cash), a HELOC lets you borrow as needed over time, up to a certain amount of money -- kind of like a credit card.
The amount you can borrow is determined by your home’s equity, which is the portion of your property that you actually own. In other worlds, your home equity is your home’s current market value minus what you still owe on the mortgage and other liens.
Specifically, a HELOC lets you borrow a certain percent of your home’s value minus what you owe on the mortgage and other liens.
When Should You Consider a HELOC?
A home equity line of credit can be a great choice when you’re planning to use the money to make an investment in your property or yourself -- home improvement projects or college tuition, for example. (In fact, interest paid on home equity loans and lines of credit is sometimes tax-deductible, but it depends on what you use the money for.)
The most important consideration is your ability to make payments. Because you’re using your property as collateral, you run the risk of losing your home to foreclosure if you can’t make the payments. If your income is unstable or you don’t need a large amount of money, a HELOC may not be your best bet. If your reason for starting a line of credit is to repay unruly debt, you may want to look into debt consolidation options instead.
How to Know if You Qualify
Different lenders have different requirements, but, in general, most of them look at:
- Your debt-to-income ratio
- Your credit history and credit score
- The value of your home (and how much you owe on it)
Talking to the lender(s) you’re considering working with is the best way to make sure you’ll be approved and find out what your home equity line of credit would look like.
Pros & Cons of a Home Equity Line of Credit
There are a few key benefits and potential drawbacks of HELOCs. We’ve already covered some of them, but here’s what you need to know:
- If you have a reasonably good credit history and enough equity in your home, you have a high chance of being approved.
- You only pay interest on the amount you withdraw from your line of credit (similar to a credit card).
- A HELOC typically costs less over time than a personal loan (partly because putting up your home as collateral means less risk for the lender).
- If your home’s value decreases, you could end up owing more than your home is worth.
- If you don’t make your payments, you risk losing your home to foreclosure.
The Benefits of a Valley Credit Union HELOC
At Valley Credit Union in Salem, OR, we frequently help our members get home equity lines of credit, and we offer some pretty great benefits:
- Variable or fixed rate
- Rate discount available with auto pay from a Valley Credit Union checking account
- Loan up to 90% of loan to value (LTV)
- Minimum payment 1% of the outstanding balance monthly
- 10 year draw period with a 10 year repayment period
- No pre-payment penalties
- Low processing fee and annual fee
Ready to take the first step?
We can help you explore your options, decide if a HELOC is right for you, and walk you through the process of getting and paying off your home equity loan or line of credit. Experience the Valley Credit Union difference for yourself! Contact us today to get started.
About the Author
Justin Roberts, Vice President of Lending
Justin Roberts is our Vice President of Lending and has been in the financial industry for over 18 years. He is an Oregon State University Graduate and has just completed Western CUNA Management School. When he is not focused on helping the members at Valley, you will find him coaching his two sons and volunteering his time to help develop the youth in our communities through sports.