It can be both fun and expensive to make changes to your home. If you do the project right, it can increase the value of your home by a lot of money. Getting the money, though, and knowing how to do it in the best and cheapest way, can be more than a little confusing. But a home equity line of credit (HELOC), which is a type of mortgage, might be just what you need to get access to the equity in your home.
What are HELOCs?
A second mortgage is what a HELOC really is. You get a bank account that lets you get the money you need. The amount of cash you can get is based on how much equity you have in your home and how much you want. Before giving you a credit limit, the lender will look at your credit report and your ability to pay back the mortgage. Most of the time, a credit card or checking account is used to get to the cash.
What's the deal?
The money from the HELOC is not given to you all at once. Instead, it is put into your account and you can take it out as you need it. Usually, you have to make at least a certain number of draws, and you have a certain amount of time to do so. This time frame can last up to 11 years.
You can choose how much money you want to take out and when you want to do it. If you don't want to use it all, that's your choice.
How do you get paid?
As you go, you make payments on the interest. The good thing about this is that you only pay interest on the money you use. On the other hand, you pay interest on the total amount you borrow with a home equity loan or any other type. So, if you choose not to use the whole amount, you will save money.
How Does It Get Paid Off?
Most of the time, a HELOC will be paid back in one of two ways. The first way is to start making payments to pay off the loan after the draw period is over. The total length of the HELOC could be anywhere from 15 to 30 years, and the length of time you have to pay it back is the number of years after the draw period. As a second option, the whole amount may become due all at once at the end of the draw period. This is called a "balloon payment." Most of the time, this would require refinancing. Depending on the agreement, you may or may not be able to get the loan again after you've paid it back.
What else do we need to know?
Most of the time, a HELOC is an adjustable-rate mortgage. Even though some people are now
most of them are not offered as fixed-rate mortgages. You should also know that most of the time, the interest rate is calculated every day. A "margin" is another thing you need to know about before you buy.
Using a HELOC to pay for home improvements is a great way to use your home's equity. Adding to the value of your home is a great way to use your HELOC funds, and it can also help you save money on your taxes.
