HELOCs-What You Need to Know Once You've Been Approved

If you’re a homeowner, you may have considered a home equity line of credit (HELOC) to help you afford improvements. But what happens after you get approved? There’s a lot to know about HELOCs and how best to use them, and Mountain America Credit Union has the information you need.

Good—and NOT so good—ways to use HELOC funds

When deciding how to use a HELOC, the best strategy is to make improvements that align with your long-term financial plan. Consider options that either retain their value or provide a bigger return on your investment, such as:

• Home renovations

• College education costs

• Landscaping

• Medical expenses

• Vehicle purchase

• Property investment

• Start-up business expenditure

• Debt consolidation

Conversely, since your house is on the line as collateral, it’s recommended that you don’t use a HELOC for high-risk ventures or items that don’t increase in value, like the following:

• Investing in the stock market

• Vacations

• New entertainment system or other technology

• New clothing or furniture

Paying back your HELOC

A HELOC has two phases: a draw period and a repayment period. Each period typically lasts 10 years but this can vary from lender to lender. Typically, you pay interest-only monthly payments with a variable rate during the draw period.

Once you enter the repayment period, you pay the principal plus interest, so your monthly payments increase. When you enter the repayment period, your loan converts to a closed-end loan, so you no longer have that line of credit. If you want, you can negotiate with your lender to have that line extended.

As your draw period comes to a close, consider your options to either pay off or refinance your HELOC:

1. Pay the HELOC in full

   If you have the cash, use it to pay the fully amortized monthly payments until you reduce your balance to zero.
    

2. Refinance into a new HELOC and new draw period

   If you do this, you can keep accessing HELOC funds and postpone your initial payoff period.
    

3. Refinance into a home equity loan

   With this option, you get a fixed interest rate and term, but you don’t have access to draw money.

How to get the most from your HELOC

If you want to make sure you are doing everything you can to utilize your HELOC to the best advantage, here are some tips to maximize this financial strategy:

• Don’t withdraw more than you need.
   

• Understand how a HELOC works and how much it will cost you.
   

• Read the fine print—be aware of any upfront costs, closing costs or annual fees.
   

• Make payments on the principal during the draw period to reduce interest charges.
   

• Get the best rate with a good credit score, strong loan-to-value ratio and adequate equity in your home.
   

• Determine your payback plan, set a budget and stick to it.

If you’re looking for a way to pay for home renovations, medical expenses, debt consolidation and more, consider tapping into the power of your home’s equity. Shop around to find the best deal and be sure you understand all the terms of your loan. If you have any questions about HELOCs or other financial strategies, reach out to an expert at Mountain America—we’d be happy to tell you more.