What is a HELOC, and Why Does it Matter?

What is a HELOC, and Why Does it Matter? Home equity lines of credit (HELOCs) aren’t for everyone, but the innovation they’ve led to might surprise you.

If you’re new to homeownership, a home equity line of credit (HELOC) might not be something you’re too familiar with.

That’s understandable—if you’re just getting started on your home buying journey, you probably wouldn’t have any use for a HELOC…

Because HELOCs rely on borrowing against your home’s equity, you’ll need some time in your home to build some equity.

And if you’ve already got enough equity to consider a HELOC, great!

You’ve come to the right place. As you probably know, a home equity line of credit is a great way to take advantage of your home’s value to pay off personal debts, or to do some major renovations/repairs on your house.

But before you go and apply for a HELOC, finish reading this guide first! We’ll explain the pros and cons of utilizing a HELOC, as well as how you can take advantage of an improvement on the HELOC—the ALOC.

Defining the HELOC

Essentially, a HELOC takes the place of a standard loan.

It’s called a home equity line of credit because you’re borrowing against the equity in your home—your home’s equity is the value of your home minus what you still owe on your mortgage.

Think of it as a credit card. You’ll have to take out as much as you need, but you’ll have to pay it back eventually. And, unlike a credit card, your home will be used as collateral for your HELOC.

With that in mind, it’s important not to go overboard with your line of credit.

And when it comes to spending that money on your home remodeling projects…

But if you do spend to your limit and you can’t pay it back you might lose possession of your home.

Draw and Repayment

If you decide to take out a home equity line of credit, you’ll need to be familiar with your HELOC’s draw and repayment period.

During the draw period, you’ll be able to withdraw however much you want up to the limit—typically 85% of your home’s equity minus what you still owe.

In most cases, the draw period will last about 10 years. During that time, your lender will usually require you to make minimum payments toward your HELOC.

After your draw period ends, you won’t be able to withdraw any more equity from your HELOC.

This is when the repayment period will begin.

Depending on the agreement you made with your lender, you’ll have to pay back the amount you withdrew plus interest in a single lump sum, or you may be able to pay it off month by month.

Keep in mind that HELOCs typically come with an adjustable interest rate. So, your monthly payment will fluctuate up and down depending on an index of your lender’s choosing. This goes for the minimum payments during your draw period as well!

Pros & Cons

Now we’ll tackle the pros and cons of taking out a HELOC.

We’ll start with the pros:

• No fees for withdrawals: With a HELOC, you’ll typically be able to get the cash you want at any time, without a fee.
• Payment flexibility: In many cases, your lender may allow you to make interest-only payments during your draw period.
• Low-interest rates: Because you’re using your home as collateral, the risk for your lender is much lower—you get a relatively low interest rate as a result
• It could be tax deductible: The interest on your loan will oftentimes be tax-deductible.
And of course, the cons:
• Low payment problems: Making low payments during your draw period is tempting, but if you don’t pay back enough before your repayment period begins, you’ll be paying off your HELOC for a while.
• Payment spikes: If you make interest-only payments for your entire draw period, you might be caught off guard by monthly payment spikes. As your repayment period begins, your monthly bill could increase by hundreds of dollars to account for your HELOC principal.
• You might spend too much: As we mentioned earlier, home remodeling is a slippery slope. The last thing you want is to burn through your equity, no matter how nice the renovations might look. That’s why it’s a good idea to leave at least 20% equity in your home—and 30% is even better.

These are just a few of the most important pros and cons to be aware of. Like any financial move, utilizing a HELOC is a risk. Still, if you plan for it and spend your equity wisely, you could end up with the new and improved home of your dreams.

Like any loan, you should shop around for a lender before you make a decision. Look out for hidden fees, and make sure you and your lender are on the same page about repayment options before you sign any paperwork.

The HELOC…Only Better

One of the biggest problems with a HELOC is the variable interest rate.

It’s very likely that the interest rate could fluctuate, and your monthly payment will fluctuate with it.

Sure, you can withdraw a lot of cash from your HELOC, but it’s not really working for you.

That’s where the advanced line of credit (ALOC) comes in.

If a HELOC is a door that only opens from the inside (only letting cash out), you can think of an ALOC as a revolving door.

In other words, it’s an all-in-one checking and savings account. You put money in to pay for monthly expenses, and you withdraw that cash whenever you need it.

Meanwhile, the cash you leave in (unused funds) goes to work, sitting against your daily ALOC balance to keep your interest and repayments low…

Money Max Makes it All Work

The truth is, without the Money Max Account your ALOC is just another line of credit.

The key is the advanced banking software behind Money Max. It takes all of your debts, payments, and expenses into account.

But what really makes the ALOC method work is Money Max’s calculations for the amount, timing, and destination of your transfers.

Of course, you always have the final say where your money goes; the Money Max Account only creates an action plan for you to follow.

And if you do follow it, the results are staggering. By making strategic payments with Money Max as your guide, you can pay off your mortgage and other debts in as little as 7 - 10 years.

And it only gets better…

Most of the time you don’t even have to think about it, because the Money Max Account is working 24/7, 365 to constantly update your roadmap out of debt.

We hate debt just as much (if not more) than you do. It’s the reason we’ve worked for almost two decades to pioneer a system that gets you out of debt and into the lifestyle you’ve been dreaming of, in less time.

Why worry about a HELOC for your home remodeling project? That’s just more money in your lender’s pocket. In under 10 years, you could be living debt-free in your newly upgraded home.

All this is possible with the Money Max Account. The start of your debt-free future is just a click or call away—so, visit our homepage for more information or give us a call. Our representatives are standing by to give you all the details.