A home equity line of credit, or HELOC, can allow you to borrow against your home equity as you need the money and make monthly payments, as opposed to borrowing a lump sum. Here's a calculator that can give you a better idea of how much you should be able to borrow.
What is a HELOC?
A home equity line of credit, or HELOC, is a combination of a home equity loan and a credit card. Like a credit card, it gives you a borrowing limit, which you can access as needed or go without using at all. You'll need to make monthly payments when you use the credit line, and you'll be assessed an interest charge. HELOC interest rates are variable and are usually connected to the prime rate or another benchmark interest rate.
Unlike a credit card, the HELOC is backed by your home's equity. If you don't make your payments, the bank can go after your home in order to get paid back. Because this makes a HELOC a secured debt, interest rates are usually much lower than you could hope to get from even the best credit cards.
How much could you borrow?
Borrowing capacity with a HELOC depends on the current value of your home and the outstanding balance(s) on any mortgages you have on the home. Different lenders have different guidelines -- 75% total loan to value (LTV) is common, but it's not rare to see offers for home equity loans and lines of credit with LTV as high as 90%. Take, for example, a 75% total LTV. If your home is worth $200,000 and you still owe $100,000 on your mortgage, then you could obtain a HELOC with a credit line of $50,000.
Here's a calculator that can help you determine your borrowing capacity. Be sure to use a realistic value for your home for the most accurate calculation.
Is it the best option?
Depending on what you need the money for, and how much you need, a HELOC may or may not be a great option for you. It's generally a better idea than borrowing with a credit card, as the low HELOC interest rates offered by lenders could easily mean thousands in savings. A possible exception would be if your credit card has a 0% APR introductory period and you anticipate paying off the balance quickly.
However, there are some circumstances where a HELOC may not be the best option. To name one example, if you know you need a large sum of money right away – let's say to finance home renovations -- then you might be better off with a traditional home equity loan. On the other hand, if you want the financial flexibility to borrow but don't have an immediate need for a large amount of money, then a HELOC could indeed be the way to go.
The bottom line is that a HELOC is only one type of borrowing. Before you decide, it's important to evaluate all of your options and their pros and cons for your personal situation.
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