a scale with a bag of money on one side and a house on the other

Utilizing the equity in your home when you need to borrow money can be a very useful tool.  I work at a community bank, and community banks are geared toward the health of our communities, which means the health and longevity of our customers. We’re here to provide you products and services, so that you can live your best life. Let’s talk for a moment about the Pros and Cons of a Home Equity Line of Credit, also known as a HELOC.

Pro: The draw period can last between 5 and 10 years.

First off, a draw period is the time when the line of credit is open to be borrowed against. If you start a project with $3,000 borrowed and in six months you learn you’re going to need $2,000 more it means you can still borrow that $2,000 to finish your project. In summary, you don’t have a short time limit on your home improvement project. And I know from experience that no home improvement project is ever quick and easy. I redid my kitchen myself and the full process took three years to complete. It was a long time with cabinet doors set up on sawhorses all over the house while I painted the cabinetry.

There’s always going to be something that goes wrong and pushes the completion date back by a few days, or sometimes a few months, which is why a HELOC is such a good solution. You can use the credit when you need it and you don’t have to borrow the full amount for which you’re approved up front if you don’t want to. That means you’re less likely to borrow more than you need.

Pro: Improve the value of your home.

When you use a HELOC to do a project that raises your home value, you, the lender, and your neighborhood win. Initially, you’re reaping the benefits of a fresh, clean renovation. In ten years you might be selling a house that doesn’t need a new roof or all new windows, which means you’re getting closer to market value for your investment. And, as long as you have a mortgage, the lender is loaning money on an improved property and your neighborhood could see an overall increase in the value of their homes as well. When property values increase that means your resale value increases. Add to that the fact that you live in a vibrant, healthy community and we have a winning solution.

Gee, I’m really making home improvement projects sound like a lot of fun! In truth, I enjoy the process and generally do my own work. If you’re not experienced, or want to avoid the hassle of a three year kitchen project, budget to hire the work out to a contractor. If home improvement is not your thing you’ll be much happier in the long run. Now, let’s move on to a couple of cons.

Con: Rising interest rates might increase your payment.

While a rising interest rate environment is a challenge for anyone with an adjustable rate product, the flip side of this con is that you may be in a period of repayment during which rates are falling. Maybe. There’s no way to predict what interest rates are going to do. Even we bankers have no idea. The best way to overcome this is to carefully analyze your need for the loan as well as how it might benefit you in the long-run. The long-term improvement in the value of your home may outweigh the cost you incur during repayment while rates are elevated. It’s most important to analyze the project at hand and evaluate whether it’s necessary and whether it adds long-term value. Don’t be afraid to consult your realtor or a trusted expert in the field to get a second opinion on the latter. They’re trained to know which features of a home add value and drive resale value.

Great news! Central National Bank offers fixed-rate HELOCs, which is a big benefit because it’s fairy uncommon to find a fixed-rate HELOC.

Con: You might overspend, and find yourself owing more over the long-term.

It’s true. Sometimes the simple update to your living room or bathroom unearths problems with wiring or pipes that add thousands to the cost of the project. Unless you built your home you likely don’t know what’s hiding beneath the sheetrock and under the carpet. Some people find gorgeous hardwood floors and other people find molding subflooring that requires repairs before you can proceed with new flooring. The hope is that you’ve done your homework as much as possible and also evaluated your risk tolerance before jumping into a new loan or project. If the project has the potential to turn into a money-pit the better solution might be to wait until you’ve saved up some funds so you’re not relying entirely on a HELOC to complete the project.

How does it affect your credit though?

A credit score is largely based on your ability to manage your account balances and spending. So if you manage your HELOC well, and don’t end up in over your head on a project, it’s likely that a HELOC can improve your credit score in the long run. Keep in mind that obtaining the loan may cause your score to lower by a few points initially. This is because the lender will perform a hard credit inquiry during the lending process.

If you can prove to lenders that you’re a good risk to take, you can improve your score in the long-run by making regular, on-time payments.

In a pinch, you can also use a HELOC to pay off a credit card balance. This is a little bit of a double-edged sword because it might keep the credit card companies temporarily happy if you can keep your balance at zero. But because you’ve just transferred the loan over to the HELOC you do still have to be able to pay that balance off eventually as the HELOC goes into repayment. A HELOC differs from a credit card in that it’s secured by your house and doesn’t affect your score, but if you get in over your head on credit cards, a maxed out HELOC, a mortgage and other types of loans and it will take much longer to dig out of the hole.

Of course, you also have to have available equity built up in your home in order to obtain the HELOC in the first place. If you’re a new homeowner who still owes more on the mortgage than you’ve paid off you’ll find that a HELOC might not be a viable option.

Make smart decisions regarding a HELOC by visiting with one of our Mortgage Lenders!

If you have questions about HELOCs, or find the above information intimidating please reach out to your local Central National Bank branch and ask to be put in touch with a HELOC expert. They can answer questions you might have as well as talk through your unique financial needs so you have everything you need to make smart decisions about money.

The Pros and Cons of a Home Equity Line of Credit
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