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HELOCs Explained – What is a HELOC?


Wedding Sparklers

Owning a home is a significant accomplishment, and over time, it builds equity – the difference between your home's market value and what you still owe on your mortgage. This equity represents a valuable resource, and a Home Equity Line of Credit (HELOC) can help you tap into it.

A HELOC has similarities to a credit card. It's a revolving line of credit secured by your home's equity. Imagine a credit limit set based on a percentage of your equity (usually up to 80%). During a draw period (typically 10 years), you can borrow against that limit as needed, monthly repaying the interest on the borrowed amount. As you repay your balance, your available credit refreshes, allowing you to borrow again. This flexibility makes HELOCs a great tool for ongoing or unexpected expenses. Once the draw period ends, the loan enters the repayment phase, where you must make payments on both the principal and the interest.

What is the HELOC application process?

The HELOC process starts by contacting a lender and applying like you would for a mortgage. They'll assess your home's value, your current mortgage balance, creditworthiness, and debt-to-income ratio (DTI) to determine your eligibility and credit limit based on LTV (Loan to Value). Once approved, you enter the draw period. During this time, you can access funds through checks or transfers from your HELOC. Interest is typically charged only on the amount you borrow, not the entire credit limit.

When Might a HELOC Be Right for You?

HELOCs offer a versatile funding option for various needs. Here are some common scenarios:

Home Improvement Projects: Upgrading your kitchen, bathroom, or adding a deck may significantly increase your home's value. A HELOC can help finance these improvements without depleting your savings.

Debt Consolidation: HELOCs often have lower interest rates than credit cards or personal loans. Consolidating high-interest debt into a HELOC may simplify your finances and save you money.

Educational Expenses: HELOCs can help bridge the gap between scholarships, grants, and the total cost of education.

Unexpected Expenses: Life throws curveballs. A HELOC provides a safety net for emergencies like medical bills or car repairs.

Things to Consider Before Getting a HELOC

While HELOCs offer advantages, they come with responsibilities:

Secured Loan: Your home is on the line. If you fail to repay, you risk foreclosure.

Interest Rates: HELOCs typically offer variable interest rates, meaning they can fluctuate over time. This could impact your monthly payments.

Temptation to Overspend: The easy access to funds can be tempting. It's crucial to have a solid budget and only borrow what you can comfortably repay.

Getting the Most Out of Your HELOC

Develop a Repayment Plan: Create a strategy to repay the borrowed amount within the draw period to avoid accumulating long-term debt.

Use for Planned Expenses: Don't rely on a HELOC for everyday living costs. It's best suited for significant, planned expenses.

Track Your Borrowing: Monitor how much you borrow and ensure you stay within your budget.

A HELOC can be a powerful financial tool, but it's vital to understand the terms and use it responsibly. If you're a homeowner considering a HELOC, consult with a financial advisor to determine if it aligns with your financial goals and risk tolerance. Remember, a HELOC can unlock your home's potential, but responsible borrowing is key to making it a success story.

More Information:

HELOCs Explained Draw Period  | Loan to Value (LTV)

From the CFPB: What You Should Know About Home Equity Lines of Credit

At SCU Credit Union we offer our members home equity lines of credit and home equity loans with competitive rates and flexible terms. For Home Equity Lines of Credit, we lend up to 80% of the assessed value or up to 80% of the appraised value less the remaining balance on your first mortgage on 1-4 family owner occupied residences.

You can apply online or stop in at one of our branches for assistance or reach out to our member service call center at 781-784-7725 or toll free at 1-877-661-3300.

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