HELOC stands for Home Equity Line of Credit. It works similarly to a credit card in that one can draw upon it up to a maximum limit. However, a HELOC expires in a fixed period of time (the draw period), typically 5 to 25 years. At the end of the draw period, the entire line must be paid in full. Another important feature of a HELOC is that the interest rate varies. If current upward trends continue, the minimum monthly will continue to rise.
- Don't overextend yourself. Don't be tempted to splurge on your "new found" money; it's not really yours to begin with; you are borrowing it.
- HELOC rates are typically tied to the prime rate. You will pay X% over the prime rate, where X depends among other things on your credit profile and the equity you have in your home. Current trends for the prime rate (as of Q2 2006) is definitely upwards. So watch out, your monthly payments can rise significantly within a short time frame. Make sure that you are able to handle the added montly payments
- If applying as a couple, ask loan officer whether it would be cheaper for you if you were to switch the order of the applicants. For example, if your spouse has a higher credit rating, it may behoove you to list that person first in the application.
- While a HELOC can be a handy source of cash in an emergency, it does require discipline to hold back from the temptation of spending the HELOC down. Don't get caught in this trap!
- Some lenders will lend at more than 100% of the equity in your home. Be very very weary of such a loan.
- Do shop for a HELOC from different lenders. The HELOC market is highly competitive; some banks have gimmicks and offer teaser rates; others will charge less in interest for the loan. Do ask ahead of applying what the HELOC rate is given your situation (e.g., your credit score, the equity in your home).
- Lenders will want to pull your credit record to determine your eligibility and the rates that they will offer. If you have your credit pulled, do ask for your credit score. You can then use this information if you need to shop your HELOC application to other lenders.
- The interest you pay on your HELOC may be tax-deductible. Do consult your tax advisor or accountant.
- Don't miss or be late on a single payment! This can affect your credit score dramatically and you will most likely be hit with a late fee. If you're late, do call the bank and explain your situation. With a bit of coddling, the lender can waive any fees. If the first person you talk to balks at waiving a late fee, do ask to speak to the supervisor. In all cases, be courteous and explain your situation in a calm but firm manner. Yelling and being angry over the phone will not increase your chances of getting a late fee waived. Being courteous, firm and persistent will.