Taking out a Home Equity Line of Credit (HELOC) allows homeowners to take a revolving line of credit against their home’s equity. Austin Community College District (ACC) experts share tips on what you should know before taking a HELOC.
Written by: Job Hammond, ACC Real Estate Professor
Published articles in MoneyGeek
How do HELOCs’ variable interest rate work, and what are the key risks that borrowers should be aware of?
A Home Equity Line of Credit (HELOC) operates like a revolving line of credit that allows a homeowner to withdraw cash from the equity in their home. Equity is the difference between the mortgage balance and the home’s value. Unlike most fixed-rate mortgages with a consistent interest rate throughout the loan term, HELOC loans offer variable interest rates, which can change over time. Your HELOC loan may be tax-deductible if it is used to improve your home and you itemize your deductions. Borrowers should use a HELOC for prudent spending decisions and financial care. Failing to make loan payments can lead to your home’s foreclosure.
What strategies can borrowers use to negotiate lower HELOC interest rates with lenders?
HELOC loans include a variable rate, which can move up or down based on a benchmark rate. The Secured Overnight Financing Rate (SOFR) is the most common benchmark for HELOC loans. Securing the best rate with lenders can be achieved by rate shopping, improving your credit score and considering alternative loan products. Loan products have various terms, including interest rates and fees. Consider using quotations from multiple lenders to secure the best rate with your preferred lender. Your credit score is an essential factor that determines your interest rate. To keep your credit score high, ensure you pay your bills on time, reduce revolving credit balances such as mortgages and avoid having too many credit accounts. If you seek a lump-sum loan instead of a credit line, consider a second mortgage, allowing a fixed interest rate and consistent monthly payments.
Can you provide some instances of how a HELOC might be misused and discuss the potential consequences borrowers could face in those situations?
A Home Equity Line of Credit is an excellent way to unlock the equity in your home, but it can be misused and cause issues for the homeowner. Exemplary uses of equity include home improvements and consolidating debt from high-interest credit cards. Borrowers who use loan proceeds to fund luxury vacations or spend beyond their means can hurt their financial future. Make sure to make payments on the loan to avoid losing your house. Consult with a financial advisor and have a strategy for using and repaying the HELOC.
In simple terms, Can you please explain what a HELOC is and how it works?
A Home Equity Line of Credit (HELOC) operates like a revolving line of credit that allows a homeowner to withdraw cash from the equity in their home. Equity is the difference between the mortgage balance and the home’s value. The HELOC will enable you to use your home’s value as collateral to borrow money. Your credit history impacts your interest rate and your ability to obtain a loan. Those with bad credit are considered high-risk borrowers, and your HELOC may be declined or approved with a higher interest rate.
How does bad credit affect one’s chances of securing a HELOC?
Homeowners with poor credit should consider improving their financial situation and credit scores to obtain favorable terms. Credit scores may improve with timely bill payments, debt reduction and the urge to open new accounts. Consider seeking advice from a financial advisor or credit counselor as part of your plan for future credit needs. Improving your credit situation can take some time, but improving your financial profile can increase your chances of a HELOC approval with the best possible terms.