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HELOCs - What Are They?

By
Real Estate Agent with Realty One Group # S.0190863

How often do we get asked in our careers, "What is a HELOC?" And certainly, many have been asking lately. Especially with Las Vegas home values having risen over 50% in the last few years. Now Las Vegas homeowners are looking for ways to tap their equity without selling their home or refinancing their primaryHELOC mortgage. Because of that current interest, this may interest you if your home has gained significant value since you purchased it.  Or even if you’ve just paid so much of the mortgage down that you’ve got ample equity to work with. Either way, a HELOC on your home might make sense.

As many of us have seen before, Home Equity Lines of Credit (HELOCs) are popular options for homeowners in this very situation. HELOCs are flexible loans that give you a lot of options. They also give you that extra time to decide what you want to do with your equity. However, a HELOC can also be a bit confusing because they don’t work like a more traditional home loan. So, let's cover the points of what is a HELOC.

A HELOC is a Line Of Credit

Keep in mind that when it comes to a HELOC, unlike a traditional home equity loan, a HELOC is a line of credit. That means that they work much more like a credit card than a mortgage. You’re approved for a line of credit that represents the maximumWhat is aHELOC amount of money you can charge to your HELOC. Then, your payments are based on how much of that line of credit you’ve used.

If you max out your HELOC, you can pay it down and charge again, just like with a credit card. Unlike a credit card, however, your home is being used as the security for this loan. And so if you get in over your head, your home is at risk of foreclosure. So you must be very careful with this particular kind of credit line.

Related: Choosing The Right Loan

They Have Two Separate Loan Periods

HELOCs start out their lives as open lines of credit. This allows you to charge or pay off as much as you wish at any given time. You’re usually expected to make at least an interest payment each month, but beyond that, you can charge a lot or a little and only pay based on the percentage HELOCof the credit line you’ve utilized. This is known as the “draw” period. As I write this in September of 2022, I see unique programs available. Charity Bond of Epiq Lending has a HELOC where payments don't start for 6 months. This is a great way to make repairs to a house before your sell it.

This period of the HELOC, where it functions as a line of credit, is usually about 10 years. However, it can be more or less, depending on the loan you take out. Immediately following this period, your HELOC becomes a set loan. At this point, you can no longer charge anything else to the line of credit.

The Repayment Period

In the repayment period, your HELOC becomes much more like a traditional second mortgage. And so it has a payment that’s based on the amount of credit you ultimately used during the draw period. From here on, your payment is more or less fixed, but can vary if you have an adjustable rate loan. The repayment period is usually about 20 years. However, that can be different based on your agreement with your bank.

There is often a balloon payment due at the end of the repayment period. And so if this is a concern for you, you have options. Either have a loan that will fully amortize or pay extra each month to ensure your last payment takes your note to a zero balance. A simple amortization calculator can help you figure that out.

Related: 5 Things That Can Ruin Your Chances Of Getting A Mortgage

What Can I Use It For?

Certainly, there are many ways that you can use your HELOC. Many owners use them to consolidate debt. After all, to pay off credit cards over 20% APR with a HELOC of say 10% APR makes great sense. Many homeowners use their HELOC to remodel or upgrade their home.

Other homeowners use their HELOC as a way to increase their investments. I have seen homeowners get a HELOC and then use the funds to buy an investment property. Again, if you pay 10% interest on the loan, but make a 30% profit, you come out far ahead. Especially when looking at a long term strategy with an end goal of a CRT or similar tool.

Related: Find Your Real Estate Strategy

 

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Comments (15)

Ray Henson
eXp Realty of California, Inc. (lic. #01878277) - Elk Grove, CA
Realtor

Helocs can be a good source of money, but it can take some time.  My clients wanted to access their money to purchase another house, but were told it could take a few months to get approved.  That was too long to wait.  It would have been much better if my clients had planned ahead a bit.  Hope you are doing well!

Sep 27, 2022 07:56 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Rocky and Thank You for sharing this information with us here in the Rain.

Make it a Special Day!

Sep 27, 2022 08:15 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Hi Rocky there are rules with deductability and I would not use equity to pay off other debts.

Sep 27, 2022 08:24 AM
Leanne Smith
Dirt Road Real Estate - Golden Valley, AZ
The Grit and Gratitude Agent

Back in IN, we had one to replace our roof. We paid it off ahead of time and the interest was much lower than a credit card.

Sep 27, 2022 09:16 AM
Roy Kelley
Retired - Gaithersburg, MD

This is good information to share with home owners.

Have a great day and an outstanding week.

Sep 27, 2022 09:23 AM
Susan Aincham
Salt Lake City, UT
Real Estate Investor / Agent

Great article Rocky!   I have see Heloc which may start out as low rate, but read that fine print they can go up to 19%+. Also a Heloc is not a non recourse loan, it can follow you for ever.  I agree with Grant I would not use them to pay off debt.  Right now people should be focused on getting themselves debt free not just moving the debt.

2005 to 2007 California homeowners used their homes as ATM’s and some who thought it would never end lost their homes of 25-30 years and were stunned how it could happen.

I also don’t think I would buy a rental property with a Heloc, as there are always unforeseen issues and then you are in deeper water.  Maybe if you had a basement you were fixing to rent?  But even that I am hesitant about, but if you had a detailed plan to quickly pay back, maybe.  Many investors (maybe better term is speculator’s) can’t wait long enough to follow a plan.

Also I remember in 2006-2008 as the property values when down Heloc’s lines of credit were reduced or canceled.   Food for thought.

Sep 27, 2022 10:07 AM
Nick Vandekar, 610-203-4543
Realty ONE Group Advocates 484-237-2055 - Downingtown, PA
Selling the Main Line & Chester County

I loved having a HELOC as it helped to even out the roller coaster of income we sometimes have as entrepreneurs or pay for some investment. Good post with a good explanation

Sep 27, 2022 12:24 PM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Rocky that is a lot of information on Home Equity Lines of Credit.  HELOC's can be a great tool if used wisely.

Sep 27, 2022 03:42 PM
Kathy Streib
Cypress, TX
Home Stager/Redesign

Hi Rocky- I'm glad you explained what HELOC is!!! I started reading and seeing these letters lately and had to "Google" it. 

Sep 27, 2022 04:44 PM
Endre Barath, Jr.
Berkshire Hathaway HomeServices California Properties - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Rocky six or eight months ago when I saw the market shifting when everyone else was still talking Real Estate is on Fire.... I told Diane we need to get a HELOC  Home Equity Line of Credit in case we run into an emergency.... it is a good safety net should not be used for vacations, remodels etc only as a back up that is someone who has seen two downturns of the Real Estate Market, Endre

Sep 27, 2022 10:59 PM
Kathy Streib
Cypress, TX
Home Stager/Redesign

Oct 01, 2022 07:52 PM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning Rocky. Endre Barath, Jr. offered sage advice. Great for use in emergencies, otherwise don't raid the piggy bank! Enjoy your day.

Oct 02, 2022 04:59 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Hi Rocky:

There's lots of great information here for those who might not understand HELOCs, how they work, and the pros and cons. Something to be used wisely and with the right intentions.

Jeff

Oct 02, 2022 02:26 PM
Kat Palmiotti
eXp Commercial, Referral Divison - Kalispell, MT
Helping your Montana dreams take root

Yes, this is great information about HELOCs. They can definitely be helpful for many reasons (purchasing more land, making updates, buying other big ticket items).

Oct 03, 2022 04:52 AM
Ed Silva, 203-206-0754
Mapleridge Realty, CT 203-206-0754 - Waterbury, CT
Central CT Real Estate Broker Serving all equally

Some very helpful information on HELOCs that would be useful for homeowners looking to make some repairs or purchases and not touch their mortgage or investments

Oct 03, 2022 10:19 AM