A home equity line of credit (HELOC) is one of the most flexible tools available to homeowners, yet it’s also one of the most misunderstood. Misconceptions about how HELOCs work often keep people from using their home equity strategically or from exploring the option altogether.
Whether you are looking to remodel your kitchen or consolidate your debt, a HELOC might be a great tool to assist. However, before taking the leap, let’s look at a few common misconceptions about HELOCs so you can better understand what you’re signing up for.
Myth: A HELOC affects your current mortgage interest rate.
Truth: A HELOC is separate and independent from your current mortgage.
Many homeowners worry that opening a HELOC will somehow change the interest rate on their existing mortgage, especially if they locked in a low rate during a favorable market. However, this is far from the truth. Opening a HELOC will not change, alter, or increase the interest rate on your existing mortgage. Instead, it acts as a second lien with its own terms and interest rates.
Myth: HELOCs can only be used for home improvement projects.
Truth: HELOCs can be used for many different financial purposes.
Since you’re taking out a loan against your home, it is common to think that you can only use that loan to make improvements to your home. The truth is there are many uses for a HELOC outside of home improvement projects, including:
Myth:A HELOC is the same as a home equity loan.
Truth: A HELOC and a home equity loan are very different.
HELOCs work as a revolving line of credit where you borrow only what you need. It basically functions like a credit card secured by your home. On the other hand, a home equity loan is a lump-sum disbursement with fixed monthly payments and a fixed interest rate.
Myth:A HELOC will hurt your credit score.
Truth: A HELOC will not automatically hurt your credit score. In fact, it can help improve it if used wisely.
A HELOC can actually help your credit score because it increases your overall credit, which is good for credit utilization. Plus, on-time payments help to build positive credit history.
While opening a HELOC does not automatically hurt your credit score, applying to multiple lenders at once during the application process, missing payments, or your debt utilization spiking dramatically, could. Also, pro-longed non-payment can also lead to foreclosure.
Myth: A HELOC must be used immediately.
Truth: You can access your HELOC at your own pace.
When you get approved for a HELOC, many people believe they must draw from the funds right away. However, this couldn’t be further from the truth. A HELOC is designed to be a flexible tool where you can open it and use it when you need it. With an interest-only HELOC, Alliant gives you 10 years to draw from your line of credit, during which you’ll only pay on the amount you borrow
A home equity line of credit can be a versatile and powerful tool when used intentionally. Applying for a HELOC at Alliant Credit Union is simple, starting with an online application. If you are approved, you can access your funds digitally through online banking or our mobile app.
1. Debt consolidation combines multiple debts into a new loan with a single monthly payment. However, it may not reduce your payment or allow you to pay your debt off sooner. Reductions in your monthly payment could come from a lower interest rate, a longer repayment period or a combination of both. By opting to repay the debt over a longer period, you may pay more in interest overtime. Prior to applying, we recommend you review your existing debt and this offer to determine the best borrowing options for you.
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