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Homeownership is a lovely thing, and it’s for anyone who can afford it. When you own a home, your life changes for the better, and you’re going to learn many new terms and concepts. One such term is HELOC. This stands for Home Equity Line of Credit, and it’s something only homeowners can take advantage of. To put it simply, it’s a method of taking out a loan on the equity your home has, and it’s for anything. Many people who want to apply for a HELOC learn as much as they can about the concept, and this information helps educate you when making financial decisions regarding your home and lifestyle.

What is HELOC?

Essentially, your HELOC is a second mortgage on your home. This is not to be mistaken for a refinance. You’re not refinancing your home to take out a loan that allows you to take money out and only make one payment. It’s a second mortgage. You as a homeowner continue to pay your first mortgage in addition to a second one. This mortgage is due a lot sooner than your traditional mortgage, and it’s going to come with a much lower monthly payment.

The amount of money you can borrow with a home equity line of credit depends. It’s all about the value of your home versus what you currently owe for your home. You may take up to 85% of the equity of your home with a HELOC, which means you’ll need to do some serious math to figure out what your home is worth and how much you can borrow. For instance, if you have a home with an appraised value of $300,000 and you owe $175,000 on the home, you have $125,000 in equity. You can borrow up to 85% of that equity for a grand total of $106,250 for your line of credit.

Interest rates on HELOCs vary extensively. You’ll want to shop around for the best rates, and you must have good enough credit to qualify for a loan of this nature. The better your credit score the lower the rate you will receive.

Why Use A HELOC?

There are homeowners wondering why a HELOC makes sense for them. If interest rates aren’t low enough for you to refinance but you need to increase your available cash, this is a good option for you. HELOCs are used for anything. There is nothing that states you cannot use yours to fund your dream vacation, to pay off your bills, or to help you improve the home in which you live.

There are some considerations may homeowners don’t make when they do take out a HELOC. It’s a great way to improve your home affordably. You make a small monthly payment while taking draws on your line of credit when you need to pay for upgrades. You can redo your floors, kitchens, baths, and many more things in the house to make it more valuable. It’s an investment into your home and its value, which is always a good way to spend this money.

Financial experts agree that while you might use this to pay for other things, it’s not the best way to spend your money. If your HELOC takes you 10 years to pay off and you used it to fund a beautiful vacation for your anniversary, you just spent 10-years paying off your vacation. That’s not a great investment, nor is it an affordable way to travel.

HELOCs are a great way for homeowners to affordably borrow against the value of their home, but they’re not for the faint of heart. You’ll want to see if what you want to use the money for adds value to your financial life or if it simply means spending a lot more on something you can’t afford regardless. Ask yourself if you’re investing in your future or merely spending the future paying for something that’s long past once it’s over with. The value of your home shouldn’t be borrowed to pay for frivolous items you’re left paying for over the next decade.