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Home Equity Line of Credit (HELOC)

If you’re looking at ways to pay for your child’s college education or to do home improvements, tapping into your home’s equity is one way to come up with extra funds. Home equity is the difference between what you owe on the mortgage and what your home could sell for. A home equity line of credit or HELOC can also come in handy when you need an alternative resource to offset rising debts. HELOCs offer a stress-free way to get the money needed. Since your home secures the amount that you borrow, it’s important to understand the process of using a HELOC to avoid financial trouble.

What is a HELOC?

A home equity line of credit is a loan similar to a second mortgage. It is different only in that it functions as a credit card. The funds can be drawn by the borrower whenever needed instead of receiving them in a lump sum as is the case with other types of loans, such as home equity loans. While you can access the funds anytime you want during the “draw” period, you cannot exceed the maximum amount set when you signed on the dotted line. You could borrow from your HELOC to pay for your child’s wedding, and after you’ve repaid the amount owed, you could borrow to buy a car. Much like with a credit card where you can borrow against your spending limit as needed, a HELOC allows you to borrow, repay and repeat.

Some individuals confuse HELOCs with mortgage loans, but they are significantly different. A mortgage is used for only one purpose, and that is to finance the purchase of a home. The applicant never gets the money, because it’s directly transferred to the seller – and for the most part one sticks to a repayment plan that normally stretches from 15 to 30 years.

Conversely, HELOCs are revolving credit lines in which your home is the collateral against default. You are not restricted to using your HELOC funds for real estate needs. In this case, the money you borrow is secured by your home. Since a HELOC is a line of credit, you will be required to make payments only on the amount you actually borrow and not the full amount available. With a HELOC you may enjoy certain tax advantages versus other types of loans.

How Do HELOCs Work?

Applying for a home equity line of credit in Santa Fe is somewhat like obtaining a primary mortgage. At Del Norte Credit Union, we’ll ask you to provide similar information, including how much equity you have in your home, its appraised value, your credit score, employment status and outstanding debts. Our goal is to know the value of your collateral so we can give you an appropriate offer. Once you’ve been approved, we’ll give you a HELOC account card you can use for your line of credit.

Reasons to Get a HELOC

A home equity line of credit is best used for home repairs and upgrades.

  • You need major home repairs. A HELOC is an exceptional source of funds, especially when your home requires major repairs. When crucial systems such as your furnace or central air conditioning fail, you will have a financial resource available. A HELOC is also convenient for expensive precautionary maintenance, which can help avoid minor tragedies. You can also protect your home investment by replacing old cast-iron plumbing, repairing a cracked foundation, and bolstering a worn deck.
  • It’s time for a home upgrade. A HELOC can also be a great way to finance home remodeling projects. Leveraging your home’s equity for improvements can add value and make long-term financial sense if you choose your upgrades wisely. A minor kitchen remodel is one of the most cost-efficient upgrades. The interest on your loan may be tax-deductible if the money is used to substantially improve your home.

Why a HELOC Might Be Right for You

  • Easy to Access. Accessing funds in a HELOC is stress-free, and you can make a withdrawal whenever you need some cash, which can be in the form of a credit card or check.
  • Credit building. To qualify for a HELOC you don’t need an excellent credit score, but if used well, HELOC loans can boost your credit score significantly.
  • Less expensive. When compared to a personal loan and credit cards, a HELOC is much cheaper.

Reasons Why a HELOC Might Be Wrong for You

  • Risk of more debt. With this strategy, you may end up with more debt if you are not careful in your spending.
  • Possible foreclosure. Since your home is used as security for a home equity line of credit, a default on a HELOC could lead to losing your home. But this can be avoided if you make your payments on time.
  • Uncertainty. If your credit or home value changes, the amount on your account may be reduced. Rates could quickly and sharply rise if your HELOC has adjustable rates, leaving you with uncertainty about the next month’s required payment.

A HELOC can be a solution to rising debts, and at DNCU, we can help you address your financial situation. We’ll work with you to manage your finances in a way that leads you out of your debt problem and enables you to pay off large expenses. Visit any of our locations in Los Alamos, Santa Fe, Española, White Rock, and Northern New Mexico or contact us to learn more. We’ll help you decide if this is the right option for you.