What would you do if your basement flooded during a period of heavy rain, requiring extensive and costly repairs? What if you wanted to increase the value of your home by renovating the kitchen or adding a pool? Would you have the funds available to do so? A home equity line of credit (HELOC) allows you, as the homeowner, the opportunity to borrow against the equity built up in your home.

When you make your mortgage payment each month and as the value of your home increases, you are building substantial equity in your home. This equity can cover emergency needs for your home, or even be the source of funds you need for renovations or additions.

A HELOC is often described similarly to a credit card. You use the line of credit to make purchases, and then pay for the purchases later down the road. However, where a credit card is unsecured debt, a HELOC is secured debt — your home becomes the valued asset and is directly affected by your ability to make the necessary payments on the HELOC.

When you are shopping around for a home equity line of credit in Tennessee, it’s helpful to know the maximum line of credit you will be able to secure. For example, if a lender gives you access to 90% of your home equity—as US Community Credit Union (USCCU) does —and you have a $350,000 home with a mortgage balance of $200,000, you would be able to obtain a HELOC with a $115,000 limit (of course, your Loan to Value percentage or “LTV” will be based on your loan scenario and all loans are based on an individual’s credit score and qualifications, so be sure to check with your lender for the exact details of your loan).

  • $350,000 x .90 = $315,000
  • $315,000 – $200,000 = $115,000 maximum line of credit

The lender of your HELOC would be capable of advancing you up to $115,000 whenever you needed the cash. Most commonly, borrowers draw on their HELOC through checks or credit cards.

How HELOCs Work

HELOCs have two periods: a draw period, where you can take money out and a repayment period, where you must make payments on the line of credit.

The draw period is the time with which the borrower can extract funds from the line of credit and it can last anywhere from 5 to 10 years. During this time, the borrower will be required to make monthly payments based on the amount that is drawn from the HELOC, to include interest, which is calculated on a daily basis. The good news is, you are only charged interest on the amount of money accessed through your HELOC. And, once you repay those funds, interest stops accruing for that amount.

The repayment period is the time during which the borrower must pay on the principal amount of the line of credit and can extend over a period of 30 years. Some HELOCs set a monthly repayment plan, while others require you to pay off the entire balance as soon as the draw period concludes. In this situation, refinancing would be in the borrower’s best interest.

Best Ways to Use a HELOC

Because a HELOC allows you to draw a significant amount of funds as you need them, it provides several opportunities to expand the impact of your finances.

The best ways to use a HELOC include:

  • Decreasing credit card debt
  • Increasing home value through improvements
  • Repairing and maintaining a home
  • Covering college tuition
  • Keeping up with medical expenses
  • Taking a vacation to spend time with family and friends
  • And paying for other sporadic needs

Use your HELOC as an opportunity to build wealth into your home or invest in large expenses. Avoid drawing from your HELOC for things like:

  • New cars
  • Shopping trips
  • And random splurges

When you make poor choices with how you spend your HELOC, you put yourself at risk for defaulting on the loan and losing your house to foreclosure.

Finding the Best Rates

Check your credit score before beginning your search for the best HELOC interest rate. The higher your credit score, the better rates you will receive from any lender.

Shop around for the best HELOC interest rates. Get a quote from your existing financial institution, but also check with other lenders and compare rates. Some providers have introductory offers with lower rates for a specified term limit. Credit unions like US Community Credit Union typically offer lower rates as they are not-for-profit institutions that serve members instead of stakeholders. For example, USCCU’s current special includes an introductory rate of 2.99% APR for the first 12 months.*

The maximum rate on a HELOC across the country sits around 16%-18%. With an introductory rate special, you will pay far less in interest for the first 12 months of the HELOC, making your dollar stretch further. Always look for a special that minimizes your out-of-pocket expenses. The current USCCU special will pay up to $500 in closing costs** – a substantial cost savings.

Set Yourself Up for Success with a HELOC

Before you apply for a HELOC, consider your current financial needs to determine if it really is the right route for you. To place yourself in the best position for maximizing a HELOC, ensure you meet the following characteristics:

  • You have a reliable income. If at any point your income changes and you are unable to pay the monthly payments, the lender could force foreclosure or cut off the line of credit.
  • You can afford the upfront costs. When you open a HELOC, you will have to pay fees and closing costs similar to those that come with a mortgage, including home appraisal fees, document preparation fees, and even annual maintenance fees. Some lenders may offer HELOCs without closing costs based on agreement of a specified loan length, but always ask about potential additional fees, as those may be added over the course of the HELOC.
  • You have high equity in your home. Homeowners who have paid off a large percentage of their home are in a great position to successfully utilize a HELOC. Take the value of your home and subtract the balance left on your loan to calculate your current equity.
  • You need to borrow a significant amount of money. If you only need a small boost of cash, it may be better to look into getting a low-interest credit card and cover your needs without the upfront costs and interest rate risks.
  • You can handle interest rate fluctuations. During the course of your HELOC, the interest rate will increase and could reach the maximum cap. If you cannot afford the potential maximum monthly payment, a HELOC might not be the answer for you.

No matter which lender or institution you decide to go with, review the interest rate, lifetime, and periodic caps. Develop an accurate understanding of the maximum rate and monthly payments you could be required to pay with any HELOC.

If you have any questions, contact a local USCCU member services representative or check out our HELOC rates today!

*APR=Annual Percentage Rate. Introductory APR for well-qualified borrowers at a maximum Loan to Value ratio (“LTV”) of 90% depending on borrower’s loan scenario. Introductory Home Equity Line of Credit (HELOC) rate as low as 2.99% APR for the first twelve (12) months. After twelve month introductory period, APR will default to qualifying rate as determined and disclosed at the time of the loan closing. As of 2/15/2019, qualifying interest rates are as low as 4.25% APR with a product floor rate of 4.00% APR and the maximum is 18.00% APR. Rates are based on the Prime Rate published in the Wall Street Journal Money plus a margin. Rates and terms based on individual’s credit score and qualifications. Rates and terms subject to change. Home value is based on US Community Credit Union verified source such as an appraisal, which is required. Borrower pays appraisal fee. Property insurance will be required, including flood insurance if applicable. Minimum line amount $25,000. Offer not available to members who have an existing Home Equity Loan or HELOC with US Community Credit Union. Early loan termination fees may apply. Home Equity products available in Tennessee only. Limited time offers subject to credit approval. Offers subject to change or may expire without notice. Application for HELOC promotion must be submitted between 2/21/2019 and 5/31/2019. All loans are subject to credit approval. Contact the credit union for any questions regarding promotion.

** Closing costs are estimated to range between $500.00 and $1,000.00. US Community Credit Union will pay up to $500 toward closing costs for HELOCs $25,000 and higher. Appraisal fee not part of closing costs.

† Contact a tax advisor concerning tax-deductibility.