If you’ve been paying on your mortgage for a while, you’ve probably built up equity in your home. And as a homeowner, you can tap into that equity through a home equity line of credit (HELOC) to free up cash for other needs, such as a home renovation or to pay your kid’s college tuition.
"It's a really smart way to borrow money," said Nancy Elkus, vice president, senior consumer lending product manager for Fifth Third Bank. “Typically, there are tax advantages and many consumers don't realize that there's a lot of flexibility with a home equity line of credit.” As a homeowner, you’ve spent time working on your home—so why not let your home work for you? Here’s what you need to know about a HELOC and how it works so you can make an informed decision.
What is a HELOC?
A home equity line of credit is a loan that is secured by the equity in your home. With a HELOC, the lender agrees to lend a maximum amount within an agreed-upon period, which includes a draw period and a repayment period.
Rather than borrowing a lump sum of the entire amount, a borrower can access what they need incrementally during the draw period, making monthly interest payments only on the amount drawn. When the draw period ends, the borrower begins making payments that include both interest and principal.
How much can I borrow?
The amount you can borrow depends on the amount of equity you have in your home. This is determined by taking a percentage of your home’s appraised value (usually about 80 percent) and subtracting the amount you still owe on the mortgage. Use this calculator to estimate your home’s current value, then multiply by .8, and subtract the amount you owe on the mortgage. The resulting number is the approximate amount of equity available for you to borrow.
In addition to determining the amount of available equity, your lender will also factor in things such as your credit history, the amount of debt you currently have, and your income. All this information will help the lender determine exactly how much you qualify to borrow, but remember, because of the way the HELOC is structured, you only borrow what you need when you need it rather than taking all the money at once.
How can I use the money from a HELOC?
Your options for using the money are endless: You can use it for anything you choose, from vacations to home remodeling projects. And you may be able to save money as opposed to other forms of borrowing: For instance, a high-interest credit card may charge an interest rate of 15 percent, while a HELOC's introductory interest rate could be as low as 2.99 percent. Popular uses include consolidating high-interest debt, paying medical bills, buying furniture, financing large purchases, paying tuition and covering emergency expenses—just remember the funds are secured by your home.
How do I access the funds?
In most cases, your lender will provide you access to your HELOC funds via checks, card or ATM. You may also be able to draw on home equity funds through online banking. Basically, once your HELOC is set up, you’ll be able to access the money as easily and conveniently as you can access the funds in your checking account.
How do the payments work?
A HELOC isn't like a loan that gives you a lump sum amount of cash at closing—instead, it's an open line of credit where you can borrow what you need when you need it. Your monthly payments are based on the balance you have outstanding.
Most HELOCs require interest-only payments for a set draw period, such as 10 years. Throughout that draw period, you are only required to pay interest monthly on the amount you have borrowed. After the draw period ends, the repayment period begins, and your monthly payments will include both interest and principal.
What are the HELOC benefits?
If you’re weighing a HELOC against other types of loans, it may offer a number of benefits. Because a HELOC is secured by your home, you can usually get much lower interest rates than with a credit card or unsecured loan.
There can also be some tax advantages associated with HELOCs. Consult a tax advisor to learn more about these benefits and whether they will apply to you.
Want to learn more about HELOCs and how you can put your home equity to work for you? You can take a look at current rates, or simply schedule an appointment with a Fifth Third advisor to get started.
The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.Deposit and credit products provided by Fifth Third Bank. Member FDIC. Loans are subject to credit review and approval. Equal Housing Lender