With interest rates still at an all-time low, many people in Champaign County are thinking about renovating their homes. One way that people have been paying for those projects is through a Home Equity Line of Credit or HELOC.
A HELOC lets you borrow against your home’s equity. It provides flexibility, but you need to be careful to stay on budget when you use those funds.
Here's what you need to know about a HELOC if you plan to remodel your home in Champaign County.
How a HELOC Works
A HELOC acts a lot like a credit card. You borrow a certain amount that's defined by the lender. You then pay back that amount with interest. You can withdraw and make payments in whatever way works best for you.
The lender will give you a draw period which defines when you can withdraw money. After that period is over, you may be able to renew the credit line.
When you come to the point where you decide not to renew, or can't renew, then you pay back the outstanding balance either all at one time, or you do so over a repayment period, which can be up to 30 years.
The benefits of a HELOC and flexible repayment include the fact that you only borrow what you need, and many have no fees. The interest on a HELOC might be deducible if you use your funds for home improvements.
What Are the Risks?
As with any type of lean or credit line, there are risks to consider.
HELOCs use your home as collateral. This means you could lose your home if you don't make the payments. Your lender will try to prevent this from happening by limiting what you can borrow. But it is still a situation to consider.
Your credit line can also be reduced or frozen by the lender if you miss payments or your home's equity changes.
HELOC interest rates are tied to the prime rate. This means that if there are changes in the market, you may end up paying more.
How Does a HELOC Compare to a Home Equity Loan?
A HELOC is not to be confused with a home equity loan, as they are different products.
The difference is that a home equity loan give you a lump sum of money, as opposed to a revolving line of credit. A home equity loan is paid over the the life of the loan plus interest based on a set schedule. Most home equity loans have a fixed interest rate, which alleviates the worry of fluctuating market conditions impacting interest rates.
When is a HELOC the Right Choice?
If you need flexibility in how much you borrow for your renovation, a HELOC is probably your best choice. But if you're certain about the cost of your project and want a fixed monthly payment, then a home equity loan could be the better option.
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