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The Benefits and Risks of a HELOC

By Cindy Cabbage, NMLS#794021Cindy Cabbage, branch manager for Federated Bank's Loda location

You may have heard your friends or co-workers talking about a HELOC and wondered what this is. No, it’s not a super-strong security device used for keeping your treasured possessions safe. A HELOC is an acronym for a Home Equity Line of Credit, and many homeowners find it a convenient and helpful way to borrow money. Keep reading to learn more.

How Does a HELOC Work?

A HELOC is basically a line of credit that uses your home as collateral. In effect, it acts as a second mortgage of your home. Typically, homeowners are allowed to borrow up to 85% of the equity in the home. HELOC’s often have two phases: the open phase during which time the line of credit is available for borrowing and the repayment phase where the money borrowed is repayed. During the open phase, minimum monthly payments are usually just the interest on the loan while during the repayment phase, monthly payments are set to repay the debt in the agreed upon term.

What Are the Benefits of a HELOC?

In recent years, low mortgage rates have contributed to the rising popularity of the HELOC as a financing tool. A HELOC is relatively easy to secure and is more flexible than a typical home equity loan. The homeowner is in control of how much money is actually borrowed, which may be lower than the amount that is approved for the line of credit.

What Are the Risks of a HELOC?

While there are good reasons to have a HELOC, there are also risks associated with it. The primary risk is that homeowners who fail to repay on a HELOC could be putting their house in jeopardy. Failure to pay on a HELOC gives the lender the right to begin foreclosure on the home. Before taking out a HELOC, it is important to consider the cost and to be sure that timely repayment is possible.

If you are thinking about making renovations or improvements on your home, a HELOC can provide the financing to get them done. At Federated Bank, we have the expertise to help you evaluate the benefits and risks of taking out a HELOC. Come in and talk with us about your specific situation or give us a call at 1-800-843-3708.