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Accessing Your Home’s Equity With a HELOC

Posted October 17, 2012 in Advice Column, Downtown

A HELOC, or Home Equity Line of Credit, is simply a line of credit that uses the equity you’ve built in your home. Think of it as taking out a loan on the “savings” you’ve built up as you’ve paid off the principal balance on your mortgage loan.

How does it work?
Securing a HELOC can take a few weeks, so it’s important to start the process in advance of needing the funds. After applying for a HELOC, the financial institution will determine the appraised value of your home, the equity you have built and ensure that your home has a clean title. This process typically takes about two weeks. Once all the information is gathered, the lender will typically offer to lend you a percentage of the equity you have in your home.

After all the terms have been agreed upon by both parties, you will sign the loan papers. However, you will not receive your funds on the day of signing because you have three days to change your mind — which is called a three-day “right to rescind” waiting period. After this three-day waiting period, your funds will be available.

How do I access HELOC funds?
HELOCs are often set up with an initial “draw period,” which is the period of time you can withdrawal the available funds. Once your draw period has expired, you will continue paying on the borrowed funds from your HELOC based on the original term agreements and until all funds have been repaid (plus interest).

The funds you borrow with your HELOC can be used for just about any legal purpose, including a family vacation, home improvements or additions, to purchase a vehicle or finance a special event. Basically, it’s your money — a HELOC is simply a way of accessing it.

What are the benefits of a HELOC?
There are several benefits to a HELOC over using a credit card or other unsecured funds:
• You have access to a much higher credit limit.
• The interest rate is typically lower.
• The interest you pay may be tax deductible. (Confirm this with a tax professional.)
• When you request a loan, a lender looks much more favorably on a HELOC than he or she will a high-balance credit card.

One thing to consider with a HELOC is the length of time you plan to live in your home. You must pay off the entire balance of your HELOC if you sell your home, so if you don’t have the cash on hand, you will need to use the profits from the sale of your home to repay the loan.

Information provided by Debbie Whittie, CEO of Village Credit Union, 601 E. Court Ave., 243-4400.

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