If paying off credit card debt is part of your New Year’s resolution plans, a home equity line of credit (HELOC) may be the solution. This line of credit allows you to leverage home equity – the amount of your home you own outright – to borrow funds. Use this guide to learn more about this borrowing option and what to consider before applying.
What is a HELOC?
A HELOC is a secured line of credit with a draw and a repayment period. During the draw period, you can borrow up to your credit limit and pay back the amount as many times as you’d like. Once the repayment period ends you can no longer borrow funds and must pay back your balance in its entirety.
For debt payoff, you can use a HELOC to pay off balances on any high-interest credit cards you have. This will consolidate all your debts under one low-rate account.
Why a HELOC?
Credit card debt can snowball when cardholders carry over a balance. When this happens, the cardholder must start paying interest, based on the card’s annual percentage rate (APR), on top of the amount they initially owed. If the APR on the credit card is high, as is common with store credit cards, these interest charges can quickly become a problem. That’s why many people transfer their holiday debt to a low-rate credit card. In doing so, they’ll minimize the impact of compounding interest and hopefully get out from under debt faster.
But when you secure a line of credit with an asset, you can score an even lower rate. That’s because the lender is incurring less risk and is therefore comfortable offering a lower rate. If you own a home, consider this when weighing your options for a balance transfer in the new year.
But remember that your home is being used as collateral. If you don’t fulfill your obligations during the repayment period, you could lose your home. Practice good financial habits and create a budget to ensure you have the funds to cover your debts.
The best credit unions have HELOCs with no application fee, closing costs, or prepayment penalties. And that’s just what you’ll find at GECU. Use one of our HELOCs to consolidate your high-interest credit card debt and achieve your New Year’s resolution of becoming debt free. Use our online calculator to estimate your equity. Then, open a HELOC online today or visit your nearest branch to meet with a GECU team member.
