Is it a good idea to open a HELOC now?
If you’re looking to fund a home improvement project, or the economic devastation of COVID-19 has left you in need of cash, consider tapping into your home’s equity with a home equity line of credit, or a HELOC.
What is a HELOC?
A HELOC is a revolving credit line allowing homeowners to borrow money against the equity of their home. Borrowers can withdraw money as needed during a set amount of time known as the “draw period,” which generally lasts 10 years.
Some lenders place restrictions on HELOCs and require borrowers to withdraw a minimum amount of money each time they make a withdrawal, regardless of need. Other restrictions include the requirements to keep a fixed amount of money outstanding or to withdraw a specific sum when the HELOC is first established; however, borrowers are typically free to spend the money however they please.
How do I repay my HELOC?
Repayment of HELOCs varies, but is generally flexible.
Many lenders collect interest-only payments during the draw period, with principal payments being strictly optional. Others require ongoing monthly payment toward both principal and interest.
When the draw period ends, some lenders require borrowers to pay back the entire loan “balloon” amount. Others allow borrowers to pay back the loan in monthly installments over a new time period, known as the “repayment period.” Repayment periods are generous, lasting as long as 20 years.
What are the disadvantages of a HELOC?
A HELOC places your home at risk of foreclosure if not repaid. Before opening a HELOC, it’s a good idea to run the numbers to ensure you can easily meet the payments.
Also, many lenders require the full payment of the HELOC after the draw period is over. This can prove to be challenging for many borrowers.
Finally, if you don’t plan to stay in your home for long, a HELOC may not be the right choice for you. When you sell your home, you’ll need to pay the full balance of the HELOC.
Now is a great time to borrow if you’re in the market for a HELOC
HELOCs have variable interest rates, which means the interest on the loan fluctuates along with the general interest rate, sometimes dramatically. The economic fallout of COVID-19 has generated historically low interest rates.
The economic uncertainty the pandemic has generated also makes it a prime time to have extra cash available for any need that may arise.