Should You Take Out A HELOC?

Photo: The-Lane-Team

If you have more than 20% equity in your home, you may qualify for a home equity line of credit, or HELOC. A HELOC is a convenient and often inexpensive way to borrow money. You don’t have to get a HELOC from the company that services your mortgage, either—you can shop around with a number of lenders. Let’s look at how a HELOC works and whether its unique features might make it a good or bad option for you.

-Borrowing term: A credit card lets you borrow in perpetuity, but with a HELOC, you can only borrow funds during the draw period, which is usually the first 5 to 10 years of the loan. The rest of the loan term is a repayment-only period that usually lasts 15 to 20 years, for a total HELOC term of 25 to 30 years. You do have to make payments during the draw period, but you can’t borrow more money during the repayment period. The long duration of HELOCs can mean that you’ll pay more interest in the long run without even realizing it. The high interest rate on a credit card might compel you to pay back what you borrow faster.

To learn about the other key features of HELOCs and how they can help or hurt you, read my Financial Edge article for Investopedia, Is Taking Out a HELOC Right for You?

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