Everything You Need to Know About HELOCs (Home Equity Lines of Credit)

A HELOC (home equity line of credit) works somewhat similar to a credit card, but it is secured and protected by the equity in your home – equity equals the market value of your home minus the balance owed on your mortgage.Whatever the size of your home equity credit line, you pay interest only on the amount you use. For example, if your HELOC’s maximum is $50,000, you can borrow $5,000 or $10,000, only pay interest on what you borrow, repay that amount and borrow again as long as you don’t exceed that maximum limit.Keep reading for 5 great tips that will help you hunt down the best home equity line of credit deal for both you and your family.1. Use a HELOC for ongoing expenses, instead of one-time major expenses.A Home Equity Line of Credit is great for paying college expenses or covering a multi year home renovation because you can dip in only as you need it. You may also want to have one in place for emergencies if, say, you lose your job or get in an accident. If you’re borrowing for one major expense, you’re probably better off with a fixed-rate home-equity loan.2. Look for a low permanent rate.Teaser rates can go as low as 5.25% or even better, but will jump later. Remember, they’re designed to get you in the door. All HELOCs charge a variable rate based on the prime interest rate, plus or minus a profit margin. So, save money by looking for interest incentives. For example, a bank may take off a quarter point if you do your banking there and another quarter if you sign up for automatic payments.3. Don’t borrow more than 80% of your equity.Borrowing more will stick you with a higher interest rate. Plus you’ll leave yourself open to having your hard-earned home equity wiped out by a modest decline in real estate prices. Plus, simply stated, the more money you borrow, the greater your longer term risk in being capable of repaying the entire amount.4. Shop at your home bank first.Your mortgage lender may offer you a discount since you’re already a customer. They also have most of your records on file already, which means the application process is typically easier and faster. You should still get quotes from at least two other lenders, though, starting with a credit union or local bank. The convenience advantages of staying with your existing lender do not necessarily outweigh other better deals in the mortgage market.5. Stay away from balloon HELOCs.Home Equity Lines of Credit have a set term, typically 10 years, where you must repay both interest and principal on what you borrow. However watch out for balloon HELOCs that offer seemingly low-priced, interest-only payments. Your monthly payments will be lower, but you’ll wind up owing the entire remaining principal in a lump sum once the line of credit case comes due. In the worst case of such a scenario, if you can’t repay or refinance, you may have to sell your home.