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What is a HELOC?

a $100 dollar bill folded into the shape of a house


A Home Equity Line of Credit is a line of credit that allows you to borrow against the equity in your home., when you need it. Consolidate high-interest debt, make improvements to your home, pay for college, or access cash in the case of an emergency.

Is a HELOC right for me?

A HELOC can be right for you if:

  1. You have enough equity in your home

    • You should be fairly confident that your home will appraise for more than what you still owe on it. There will be appraisal fees associated with taking out a HELOC, so you don’t want to pay for an appraisal if you don’t end up having enough equity.
    • What is equity? Equity refers to the current market value of your home minus what you still owe on your mortgage. If it’s a positive number, you have equity in your home.
  2. You have a stable income

    • This type of credit line has a variable rate. The more money you use, the higher your payment will be and this could fluctuate based on the prevailing rate at the time. You should be able to comfortably afford the payments each month.
  3. You have funds for the upfront costs

    • Similarly to a First Mortgage, there are upfront costs/fees associated with taking out a HELOC, such as appraisal fees, title search, etc.  Some programs offer to pay for a certain portion of those costs, so be sure to do your research on what’s available at the institutions in your area.

What should I use a HELOC for?

Considering that you are using your home as collateral for this line of credit, home improvements and/or repairs seem to make the most sense. Repairs and maintenance along with improvements can help raise the value of your home and increase your equity.

There are other uses for a HELOC, but a lot of thought should be put into your decision before deciding to use HELOC funds for reasons such as:

  • consolidating high interest debt
  • paying for college
  • buying a car
  • paying for a vacation
  • starting a business

When consolidating debt, like credit card debt, it’s important to remember that you are swapping unsecured debt for secured debt, backed by your home. Unless you have a solid plan to repay the debt you consolidate using your HELOC, it may be safer to stay away from this option.

Tips on using a HELOC

Remember that student loans and auto loans do exist and may be a much better option, look into these first before thinking about using a HELOC to fund them. Auto Loans tend to have lower rates than what your HELOC may have, and vehicles are assets that depreciate quickly. Also, look into student loan options, specifically federal loans which offer benefits you can’t get anywhere else, including forbearance during financial hardships.

Paying for an extravagant vacation may be tempting, but it’s often easy to fall into a cycle of financing one trip after another. Meanwhile, the debt from the vacations rack up interest and you’re now in debt because of a family vacation. If you still want to use a HELOC for this, come up with a plan for how you will pay off those funds quickly after the vacation fun is over.

Starting a business is a risky venture to begin with, but putting your home on the line for it makes the risk much higher. Look into other loan options before risking your home for your new business. A HELOC can be a great way to borrow funds for needed expenses if you do it for the right reasons and have a sound plan for repayment.

If you are considering a Home Equity Line of Credit, check with your financial institution and see what their program offers. Check out the HFS HELOC product here. There are always pros and cons to any major financial decision, but a HELOC could be just what you’re looking for. For more guidance, make an appointment with a loan officer to discuss your options and find out if a HELOC is the right fit for you!