People use the equity in their homes for many different reasons. Home equity is often used to pay off other debt, fund home renovations and upgrade projects as well as help purchase other necessities. It’s important to know these few facts when obtaining a Home Equity Line of Credit or HELOC to ensure that this is something you can manage.
HELOCs do not have fixed rates. This means your monthly payments can fluctuate. The interest rate is determined by the prime rate plus the percentage rate that the bank has set. Let’s say the interest rate at the bank is prime + 1.5%. If the prime rate is 2%, then take 2% and add 1.5%. This gives you a total interest rate of 3.5%.
You might be paying way more than expected if the interest significantly increases. Normally your monthly bill doesn’t have much variance; however there are no guarantees. Make sure that you can afford a little fluctuation in your monthly payments.
You will be making interest only payments. This means that you will not be paying off any of the principle on your mortgage but will only be making the interest payments. To start paying off the principle or debt on your home, you’ll need to make payments above and beyond the monthly interest payments.
There will always be upfront cost and fees. This may include title fees, lawyer fees, processing fees and mortgage transfer fees. In the end it may be more than you anticipated.