March 18, 2021
Categories: Financial Hardship, Tips, Your Home
Being short on cash these days is hardly unusual. Contributing to an emergency nest-egg for some peace of mind can be difficult to swing right now. Or maybe you’ve been wanting to upgrade some parts of your house but again, funds are be in short supply. However, if you’ve got equity in your home, a HELOC is a possible way to get money for emergency cash, home renovations and other purposes.
What is a HELOC?
Contrary to popular belief, a mortgage and a HELOC are not the same. A mortgage is money borrowed in a lump sum to purchase property. The borrower pays interest on the principal (the money owed) over a period of time until the principal is paid back.
A HELOC is a line of credit using the equity in your home as collateral. A HELOC is a little like a credit card in that a financial institution gives you a borrowing limit. It’s not a lump sum; you only pay interest on the money you actually borrow, not on how much you can borrow.
What is Equity?
Equity is the difference between the value of your home and any remaining principal. As a simplified example, let’s say you bought a home for $120,000. At the time of purchase, you put down $20,000 cash and took out a $100,000 mortgage, which you’ve been paying down for several years, plus interest. Now, the remaining principal on the mortgage is $40,000 and the value of the home has remained at $120,000. This means you have $80,000 in equity in the home. In calculating a line of credit, lenders usually consider 80% of the equity to be funds accessible through a HELOC. So in this example, you’d have $64,000 of equity available to borrow.
Being approved for a HELOC depends on the results of a formal credit evaluation, which takes into account your credit history, outstanding debt, current employment and other factors. The interest rate, and the cost of fees such as closing costs, varies with the lender.
Why a HELOC?
Here are five of the most common reasons people use a HELOC.
Have Emergency Cash Available
Things happen. For peace of mind, it’s great to have an emergency pool of funds on hand for unexpected issues. A HELOC can function as the source of those funds. If you do go this route, consider the HELOC to be the emergency account itself and only take out what you truly need.
Pay off Debt
High-interest credit card or other loan debt can be a debilitating cycle of interest and fees. A HELOC with a lower rate can help ease this burden and help you pay those loans down or off.
Whether you’re tired of tolerating that pesky leak, need a real home office or don’t want to wait another summer to build that new deck, a HELOC can help you fund whatever home improvement project is on your wish list. See our blog on resale-ready renovations for renovations that tend to hold value.
Take a Trip
Even the most faithful homebodies get wanderlust once in a while, and for many of us, we are more than ready to get out and about in the not-too-distant future. Use a HELOC to fund a road trip to see relatives and friends, to go camping or just take in the scenery of wide-open spaces. See our blog on taking an RV vacation.
Pay for Education
The cost of higher education certainly doesn’t seem to be getting any cheaper. Add in textbooks, a computer and various unforeseen fees, and you could be looking at a serious investment. Whether you’d like to retool your own skills or pay for a family member to go to college, many people choose a HELOC for a source of funds that can be cheaper than a college loan.
Interested in a HELOC or in comparing loan options? Contact our mortgage team at (585) 453-7010 or (800) 836-7328 extension 7010.
You must be a member of The Summit FCU to take advantage of its products and services. The Summit is an Equal Housing Lender and is federally insured by NCUA. All loans are subject to credit approval. Must be 18 years of age or older to apply. The Summit’s loan programs, rates, terms, and conditions are subject to change without notice.
An earlier version of this blog was published here in June, 2020
Cynthia Kolko, The Summit Federal Credit Union