A Guide to Home Equity Lines of Credit (HELOCs) in Wisconsin

Home equity is a vast, underused potential: if you tap it smartly, it can revolutionize your financial future.

Tapped wisely, though, is key.

A Home Equity Line of Credit (HELOC) is likely the most common way that borrowers efficiently and swiftly convert their home equity into cash as a HELOC will let you tap your home’s equity up to as much as 80 per cent to 90 per cent, calculated as the appraised value minus the mortgage you now have on it.

Though very different in theory, in practice HELOCs are more like credit cards than mortgages: you borrow, make interest-only payments (and don’t pay interest at all if you don’t use your credit), and, in this case, interest is usually much lower and your line of credit only limited by how much equity you have. Homeowners don’t have to make payments – and don’t have to pay interest – until they draw from their HELOC.

You can get granted a $100,000 line of credit, but only accrue interest on the actual amount of those funds you actually need to tap – a feature of home equity that helps homeowners with cash-flow management, as interest only accrues on the funds they actually need to tap and they can pay back repayment accordingly.

HELOC terms are split in two phases. Draw periods, which will last 5 or 10 years, are first, meaning these are the years where you can draw from your line of credit. You are expected to make interest payments during these years, but you are also allowed to make – though you could just as easily not make – payments towards principal. The next phase, repayment, can last 10, 15 or 20 years, and without reopening the line of credit, you must begin repaying the principal as well as the interest.

A HELOC can be used for just about anything you like to do with money, from home improvements to debt consolidation (including debt related to your credit cards) to educational expenses. The raw flexibility of a HELOC is crucial’ to its appeal.

HELOCs also can be utilized for buying a second home. That can be a fantastic alternative to bridge loans to assist in putting home sellers into the position of being able to close.

Approval for a HELOC might be easier than some other loan products out there, and you could even access the money sooner once approved. But, at the end of the day, like most other forms of loan, creditworthiness is key — and most lenders will want to see a score of around 700 before funding a HELOC. You’ll also be required to have a low debt-to-income ratio, a minimum percentage of equity in your home, sufficient income and prove to be a responsible borrower with a solid payment history.

As a whole, an HELOC is a flexible and effective method to handle your finances. The only downside to an HELOC is that your home is a collateral to a HELOC. If you cannot pay your HELOC for any reason, you will be under risk of foreclosure.

As with all personal financial decisions, borrowing using a HELOC requires that you understand the terms of the loan, its conditions, and your own financial circumstances. But used wisely, HELOCs can also be a form of financial insurance to safeguard your finances.

The key to HELOC success is being informed and having a plan.