A Guide To HELOCs And Credit Scores

What is a HELOC?
A HELOC is a Home Equity Line of Credit, similar to a credit card in that you get a line of credit but you are using your house as equity, but because it is secured, you will generally have a lower interest rate than a card. This allows you to decide how much you want to pay back in the end and at what interest rate depending on when you began to use it. Most HELOCs had two periods, a draw phase which can last between 2-10 years and a repayment phase that can last up to 25 years.

Difference between a HELOC and a regular Home Equity Loan?
A HELOC has no interest or payments until money is drawn or spent, whereas on a Home Equity Loan, the payment and interest begins immediately. With lower interest rates than a credit card but it is variable unlike a Home Equity Loan which is fixed when you received it. With both you can borrow all the way up to the total value of the home, subtracting the liens, but with a HELOC you are not responsible for the entire value and only up to how much you borrowed.

How does a HELOC affect your credit score?
Originally no companies knew how to classify a HELOC and there was no difference between one and a revolving credit line like a credit card. As time went on though, the scoring was changed so that a HELOC acted differently based on how much was borrowed. If you borrow less than 50K it is treated like a credit card where over 50K is generally considered like a Home Equity Loan score wise. This can give you problems in borrowing for other large purchases if you manage it poorly, and discover you should have gotten a home equity loan instead.

Is a HELOC right for you?
A HELOC is tax deductible, and good for protecting against job loss, helping with home improvements in the future, small costs, or emergencies, whereas a loan is better for large purchases. Being great for small purchases that you are unsure beforehand how much they will cost in the end means that instead of owing the full amount you only need as much as you spent to pay back. It is also good for paying off high interest credit cards as the interest rate will be lower due to it being a secured debt. It is important to not use those credit cards anymore, though, because you will find yourself owing more and can get overwhelmed with more debt than you can handle which can result in you losing your home. Unlike a Home Equity Loan though a HELOC does not have a fixed rate and when the interest rate changes, so does the rate on your HELOC.

Choose Carefully.
Care must be taken when applying for a HELOC, as you are using your home as collateral and defaulting can result in foreclosure much the same as a home equity loan. It is suggested you seriously consider your options before getting a HELOC and know that while many of the benefits can help you, you can easily overspend and find yourself in a bad situation. Living below your means and only borrowing what you know you can pay back with plenty of breathing room are great ways to manage your money in the first place and a HELOC can help or hinder that depending on how you plan ahead and your own spending habits. If you don’t know if you can handle a new line of credit, then getting a HELOC could be considered a bad choice, but if you are using it to clean up your credit, it can be a very powerful tool to lower your over all payments and give yourself more money to spend in the end.

The author who contributed this article is Chase Sagum, Financial and Business blogger. Check out more of his content at www.lexingtonlaw.com.

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