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Should you get a HELOC just in case?
If you're a homeowner and need a large sum of extra cash, opening a HELOC is a way to take advantage of your home's equity to pay for home improvements, pay for college tuition, or pay off high interest credit card debt. However, if you do not have a specific financial need, it might not be a good idea to get a HELOC just in case or open a HELOC and not use it. Getting a HELOC requires an application process that comes with fees, and you may pay closing costs.
Read on to learn more about getting a HELOC just in case.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender which has a credit limit, a variable interest rate, and which is secured by the equity in your home. Most HELOCs have a 10-year “draw period” during which money can be borrowed, followed by a repayment period.
There are HELOC pros and cons to consider. One of the advantages of a HELOC is that you can take out money as you need it, and you will only pay interest on the amount you use.
What are the advantages of opening a HELOC?
Access to funds. Once you're approved for a HELOC you'll likely have a 10-year draw period during which you can use your money any way you choose.
Higher borrowing limit. Qualified borrowers with ample home equity may be able to get approved for amounts up to $1,000,000. This is a significantly higher loan limit than personal loans or credit cards provide.
Lower interest rates. HELOCs start with a low variable interest rate that typically stays in effect for a 10-year draw period, during which you can withdraw from your line of credit. The interest rate on a HELOC may be lower than interest charged on credit card purchases and personal loans.
Fixed-rate options. Typically, a HELOC comes with a variable interest rate, which means that the interest charged is based on a financial index that varies. As the financial index moves up and down based on economic factors, the interest rate charged to the borrower will fluctuate. Some lenders are starting to offer a fixed interest rate option during the loan draw period, so be sure to ask about variable vs. fixed interest rate HELOCs.
Downsides to opening a HELOC
Minimum draw requirements. Some lenders require you to take a minimum draw each time you access your line of credit (for example, $5,000) or withdraw a certain minimum amount the first time you use your loan.
Temptation to spend. Having easy access to money makes it tempting to spend the money on luxury purchases that aren’t necessary. Be sure to use your HELOC for your original intended purpose and do not borrow from your line of credit unless you are financially able to repay the monthly interest-only payments.
Variable interest rates. HELOCs typically start with a variable interest rate which may change to a higher variable rate after the promotion ends or may convert to a fixed rate.
As the rate goes up, some borrowers find it difficult to repay the loan at the higher rate. Failure to repay a HELOC means the lender could foreclose and take possession of your home.
Changing limits. If there is a significant decline in the value of your home, Federal law lets lenders reduce your approved credit limit.
Closing costs. Depending on the lender you choose, a HELOC may have closing costs. Like a mortgage, closing costs are paid by the loan applicant(s) at the time the loan is granted and cover various costs associated with the lender processing the loan application and transaction.
What can I use a HELOC for?
The HELOC is very popular with homeowners because it has a lower interest rate than credit cards. And you can use the money any way you’d like! Some of the best ways to use a HELOC include making home improvements, paying for college, consolidating high-interest debt, paying for higher education tuition, starting a business, and much more.
Can I open a HELOC and not use it?
Yes, you can get a HELOC and not use the funds. However, getting a HELOC and not use it will cost you time and money in lender fees and account fees that we'll discuss in detail below. If you do not intend to use the HELOC right away, you'll be paying money for a loan you don't really need.
What happens if I don't use my HELOC?
No interest will accrue. HELOCs only charge interest on the amount that's been used. For example, if you use $15,000 out of a $50,000 line of credit, you will only pay interest on the $15,000.
You won't have to make monthly payments. If you don't use your HELOC you won't have monthly payments unless the lender charges a monthly inactivity fee.
You'll have access to a line of credit. If you anticipate needing money for an expensive home repair such as a new roof or windows, or another significant expense, you may want to get a HELOC so that you're prepared.
You may be charged fees. Lenders may charge an annual fee or membership fee, simply for having a HELOC account.
You may be charged an inactivity fee. Because HELOCs are a line of credit designed to be drawn from, some lenders charge an inactivity fee if you open a HELOC and do not use it. These fees can be charged monthly or annually.
There may be cancellation fees. According to the Consumer Financial Protection Bureau, lenders can charge a fee for terminating the HELOC early, usually within the first two or three years after it is opened; also called a cancellation fee.
Lender application fees may be charged. Some lenders will charge a fee just for processing your loan application, regardless of whether you are approved for the loan.
How do I get a HELOC?
Start by talking to different lenders and comparing interest rates. Credit unions are great for HELOCs because many credit unions, including CU SoCal, don't charge HELOC closing costs.
Applying for a HELOC is like applying for a mortgage and will require the borrower(s) to provide the lender with W2s/1099s pay stubs, tax returns, and other documentation.
Approval for a HELOC will require sufficient home equity as well as meeting the lender's HELOC eligibility requirements.
If you are approved for the loan, your HELOC funds will be put into an account which you can draw from using checks or a debit card for the account.
Is getting a HELOC worth it?
A HELOC can be a great way to take advantage of your home equity to get the money you need to pay off high interest debt, make home improvements, and other large expense purchases. However, there are pros and cons of getting a HELOC. If you are trying to decide between using your credit card or getting a HELOC to make an expensive purchase, the HELOC will likely save you money on interest, even with its variable rate. Although HELOCs can provide you with a significant amount of money to use as you please, it’s important to be sure you have the financial means to make the monthly payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!
