Residential real estate continues to rise in value here in our Maine market, making a home a valuable source of wealth. One of the most popular ways to access this wealth is through a Home Equity Line of Credit (HELOC). A HELOC works like a large credit card, allowing you to borrow against your home’s equity as needed over a set time frame and then repay it over decades. If you own a significant portion of your home outright, you may have access to a substantial sum—often more than you could borrow with a personal loan.
Here are a few quick ideas of what to do with your HELOC (based on personal experience, so reach out with any questions!!)
-Install Solar Panels to offset your electricity bill
-Install Heat Pumps
-Use it as a down payment for a lakeside camp or beachside AirBNB rental
-Install a swimming pool
A HELOC offers flexibility, allowing you to borrow, repay, and borrow again. Interest is only charged on the amount you use, and rates are typically lower than those of credit cards or personal loans. Additionally, the interest may be tax-deductible. However, there are risks involved. You must put your home up as collateral, and since the interest rate is variable, it could increase, significantly raising your repayments.
HELOCs have two phases:
- Draw Period: During this phase, typically lasting 10 years, you can borrow money up to your approved limit. You’re required to make interest payments, but payments toward the principal are optional.
- Repayment Period: After the draw period, you enter the repayment phase, where you can no longer borrow and must make both principal and interest payments until the balance is paid off. The repayment period usually lasts 20 years, and monthly payments can rise significantly due to the addition of principal.
To qualify for a HELOC, lenders generally require a credit score above 620, a debt-to-income ratio below 40%, and at least 15% equity in your home. While a HELOC can be a convenient and cost-effective way to access cash, it's important to understand the potential risks, including the possibility of losing your home if you’re unable to make payments.
