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To recap last week’s blog in a nutshell: home equity loans provide one-time lump sums that are satisfied with a fixed interest rate over a set amount of time. Got that?

Welcome to part two of our lesson on equity finance: Home Equity Lines of Credit (HELOC). Home equity is to mortgages as HELOCS are to credit cards. Rather than paying back the loan in equal payments each month, you withdraw money on an as-needed basis. Though different in function, both types of equity loans carry serious pros and cons, which Iowa State Bank would love to lay out for you.

Consider a HELOC if…

• “Flexibility” is the name of your game: If you’re interested in periodic cash withdrawals over time for an on-going need rather than covering a one-time expense, a HELOC can do just that. Projects like a house remodel with a payment to contractors as it progresses would call for adjustable payments you could access when needed, which is exactly what this loan could do.
• A big one-time expense is on the horizon: Because it’s backed by collateral, these rates would be lower than you’d otherwise expect as you look to finance a major event, such as college tuition or an unexpected medical bill.
• Set monthly payments aren’t your thing: Because this type of loan lets you access funds on an as-needed basis, you only pay interest when a withdrawal is made. This cuts down on reoccurring dues during periods where you’re not touching your funds.

Avoid a HELOC it if…

• Upfront costs are out of your reach: Just like the first fees you paid for your mortgage, a HELOC requires similar expenses, making it costly to get on its feet. Hundreds of dollars will be needed for application fee, appraisal, and title search, amongst other associated costs.
• You’re not borrowing that much: If your bathroom remodel requires just a couple thousand dollars, it may not be the most cost-efficient to take on a front-heavy HELOC. Opt instead for a low interest credit card for 18 months of interest-free use.
• Your income isn’t predictable: Missing a monthly payment on your HELOC could result in home foreclosure. Additionally, a drastic loss of home value or a reasonable belief that you won’t be able to repay the loan will freeze your HELOC, only to be opened when home value is restored or income is steady once more.
• A spike in interest rate would topple you: Unlike an Equity Loan, HELOCs operate on variable- rather than fixed-rate interest. Inflation and unforeseen factors could send your interest rate creeping upwards for the duration of your loan. If your budget can’t accommodate wiggle room, reconsider if this is the right option.

Just like a home equity loan, a HELOC shouldn’t be taken lightly. For help deciding if either are in your best interest, please get in touch with one of our experts today.