5 Vital Questions to Consider Before Applying for a HELOC

Homeownership provides several financial benefits and opportunities, one being the ability to tap into your home’s equity. A home equity line of credit (HELOC) turns your equity into accessible funds that can be used for various reasons, such as home improvements, debt consolidation, or other major expenses. While a HELOC offers flexibility and potential benefits, a thoughtful approach is crucial before applying for one. Here are five essential questions to ask yourself first. 

Considerations before taking out a HELOC

1. Do I understand how a HELOC works? 

Before diving into a HELOC application, take the time to understand the mechanics of this borrowing option. A HELOC is a revolving line of credit secured by your home's equity. The borrowing experience is divided into two periods: a draw period and a repayment period. The former can last years (e.g. around 10 years), giving you time to borrow funds up to your credit limit as often as you need. For example, say you have access to a credit line of $50,000. If you spend $30,000 on a home renovation, you could theoretically borrow an additional $20,000 to use toward another project. 

During the draw period you will generally have lower monthly payments than during the repayment period. For the latter, you can treat your HELOC like a regular loan you make monthly payments toward. 

2. What will I use the HELOC for?  

Consider your reasons for obtaining a HELOC. Are you planning home renovations? Consolidating high-interest debts? Funding education expenses? Having a clear purpose will help you determine how much you need to borrow and how you intend to use the funds. This focus will prevent you from overborrowing and ensure that the investment you make with the borrowed money aligns with your financial goals.

3. Can I afford the repayments?

Evaluate your current financial situation to determine whether you can comfortably afford the repayments during both the draw and repayment periods. Since a HELOC involves variable interest rates, your monthly payments could increase over time. Make sure you have a solid understanding of your budget and how the HELOC payments will fit into it. Online HELOC calculators can help you estimate potential monthly payments based on different scenarios. 

One factor you’ll need to consider is your income stability, as fluctuations may impact your ability to make payments. This could potentially lead to financial stress or even default. If your income is variable or uncertain, it might be prudent to reconsider a HELOC or have a backup plan in place to cover payments during lean months.

4. How much will it cost? 

It’s important to review a financial institution’s fee structure for their HELOCs. The best ones won’t charge you an application fee, closing costs, or an annual fee! This will help keep the cost of taking out a HELOC low, so don’t skip this important step while shopping for a great rate. 

5. What's my repayment strategy?

It’s vital to have a clear strategy for repaying a HELOC so you’re not caught off guard when the draw period ends, and the repayment period begins. Often, this repayment period can last for years, with what you owe broken up into monthly payments. Knowing this can help you more accurately budget how much to put aside month to month. 

Outline how you plan to pay off this amount, considering factors like your income growth, expenses, and financial goals. Once you’ve used the funds you need, don’t wait for the 10-year draw period to end to start saving for repayment. Use the time available to get a jumpstart, so you’re prepared. An effective strategy can prevent you from falling into a cycle of debt and ensure that your home's equity remains a valuable resource.

A HELOC is a great financial tool for both short- and long-term needs. They offer flexibility by allowing you to access cash immediately. In the short term, they also allow you to tap into your home’s equity while maintaining a low rate on your first mortgage. If rates come back down, you may even be able to refinance your first mortgage and roll in the HELOC at that time to lock in a better rate. As you can see, there are multiple opportunities to consider alongside the questions above. 

By reviewing these questions, you can make an informed decision that aligns with your financial situation and goals. While a HELOC involves some level of risk, you’ll feel confident in your borrowing decision by taking stock of your income and a realistic repayment strategy.  

General Electric Credit Union won’t charge you an application fee, annual fee, or closing costs for a HELOC. Go online to view our competitive HELOC rates. Then, schedule an appointment to review your options with a dedicated GECU team member.