Should you Get a HELOC "Just In Case"

Owning a house comes with a lot of perks! One such perk is building wealth in your home because property prices are on the rise, increasing your home’s value. This makes it easier for you, especially if you're considering getting a HELOC, just in case.

Today’s blog is packed with a bunch of HELOC related information, and who knows, you might get your queries answered by just reading one blog. Let’s quickly get into the details.

When Getting A HELOC Makes Sense?

Getting a HELOC is advisable if:

1. • ➙ You plan to invest it in something with a high return,

   • ➙ Use it to enhance your home's value, and

   • ➙ Resolve any financial challenges you may be facing.

Spending it on non-emergency situations (which we will discuss further in the upcoming section), such as buying a new car or going on vacation, is not a preferred choice. It’s not good to reinvent the wheel.

Using a HELOC as an emergency fund really helps in providing quick cash if an unexpected event occurs. This way, you need not touch your savings or other investments to help you during these times.

What Can I Use The Money For If I Get A HELOC Just In Case?

Let’s say you had substantial equity in your home and decided to get a HELOC. However, now that your HELOC is active, you don’t know what is to be done with the HELOC money.

Here’s what you can do -

• Non-emergencies are those expenses that are not associated with an urgent situation. In simple terms, they are planned and budgeted in advance. You don’t call it an emergency at all.

  For eg., Wedding expenses, paying for your child’s education expenses, starting a new business, consolidating higher interest debts, and enhancing your home’s value or design by doing home renovations.

• Emergency expenses demand your immediate attention and they must be addressed as soon as possible. It is more like an urgent situation where you require a certain amount of money to get out of it safe and sound.

  For example, Job layoffs, an unexpected illness, and vehicle or home repairs that are not covered by your home or car insurance.

How Long Can I Keep My HELOC Open Without Using It?

Alright, so when you get a Home Equity Line of Credit, there's a starting period called the draw period, usually lasting five to 10 years. During this time, you can use the money available to you and pay only the interest if you want.

It's wise to explore options from the best home equity loan companies to ensure you're getting the most suitable terms for your HELOC.

⏭️ Read on : How Long Does It Take to Get a HELOC

What Happens If You Don't Use Your Credit Line During The Draw Period?

You will be charged an inactive fee plus an additional membership fee. On top of it, if the HELOC is closed early, there is a cancellation fee involved. If you don’t want to cancel and keep it open by paying the listed fees, your lender still can’t close your HELOC without any reasonable justification.

The justified reasons could be:

1. • ➙ A complete decline in your home’s equity.

   • ➙ Committing fraud or providing false information.

   • ➙ Anything that harms the lender’s financial interests.

   • ➙ Your inability to repay your HELOC.

In short, if you have a HELOC "just in case" and haven’t used it, it typically won’t lead to your credit line being closed as you still have to pay a fee for not using it.

Here are a bunch of fees that you might end up paying:

1. • ➙ Origination fees

   • ➙ Closing costs

   • ➙ Inactive fees

   • ➙ Monthly/annual fees for maintenance

   • ➙ Account closing fees

It's always recommended to check and thoroughly understand all the potential fees involved.

What Happens If I Get My HELOC For Emergencies But Don't End Up Using It?

Until the draw period, even if you don’t use your HELOC, you will still be paying the fees. But once the draw period comes to an end, you will be entering the repayment period where you will be paying the principal amount along with the interest payments, if you used your credit line.

If you never used your HELOC, there will be nothing to repay and your credit line will be closed automatically.

How Long Do I Need To Own My Home To Qualify For A HELOC?

The time you close or finalize your property is not a big deal while planning to take out a HELOC. So, the number of days you stayed in your home doesn’t really matter to your lenders.

What matters is the equity that’s accumulated in your home. Your lenders expect you to have at least 15% to 20% of equity in your home.They determine this with the help of your loan-to-value ratio.

In short, an LTV is your mortgage debt divided by your home’s appraised value.

How Do I Get A HELOC?

If you still think that HELOC is the right choice for you, do these next👇

• Try our calculator to see if you qualify for a HELOC based on your home's value.

• Figure out how much money you want to borrow against your home's value.

• Look for the top home equity loan companies who process applications quickly and compare their offers.

• Get quotes from several lenders and get pre-approved for your HELOC.

Not sure about the documents needed? Take a quick look at our HELOC document checklist.

Pros And Cons Of Getting A HELOC Just In Case

So, what are the different upsides & downsides to having a HELOC "just in case"? Here’s an overview for you!

Pros	Cons
• Easy access to funds	• Constant rate fluctuations
• Borrow more with higher credit limits	• Basic draw requirements
• Favorable interest rates	• Spending beyond limits
• Option to get fixed interest rates	• Suspension
• Flexibility beyond emergencies

Why is it important for you to understand these pros and cons of getting a HELOC “Just in Case”?

It helps you anticipate potential challenges and benefits, ensuring you utilize your HELOC money effectively and responsibly.

Alternatives To Getting A HELOC

Just a quick heads up on the other options available to you, if you just decided that HELOC might not give you a better return on investment.

• 1. Home Equity Loan

  You get a lump sum of money, and you pay it back in fixed monthly amounts. It is a type of second mortgage and comes with a fixed rate of interest.

• 2. Personal Loan

  If you don’t want to risk using your home as collateral, this is one of the best available options. You borrow a set amount and pay it back in fixed monthly payments. But, interest rates may be higher because it's not secured by your home.

• 3. Credit Cards

  If you have short-term and smaller expenses, using a credit card is great. Also, if you manage your credit card well, you can increase your credit score to help in your future loan application approvals.

• 4. Cash-Out Refinance

  You refinance your existing mortgage for more than you owe, and you get the extra money in cash. So, if you owe $240,000 already, you refinance this up to $300,000 and the extra money of $60,000 is given to you as cash.

  The entire mortgage terms, including the monthly payments and interest rates, change, so carefully review the documents before you close a cash-out refinance loan.

How To Manage A HELOC?

Looks like someone is all ready to get a HELOC! If this is you, don’t miss these tips on how you can effectively manage a HELOC.

#Tip 1: Firstly, plan out how you will be using your HELOC funds. This helps you avoid unnecessary spending and ensures that you pay off the borrowed money when it’s time.

#Tip 2: Keep an eye on 2024 HELOC interest rate trends. If your HELOC has a variable interest rate, be prepared for fluctuations. Consider refinancing if interest rates are on the rise to lock in a more stable rate.

#Tip 3: Have a clear mode of communication with your lender. If you’re facing any challenges, communicate with your lender proactively. They might offer assistance or alternative solutions to help you manage your HELOC responsibly.

#Tip 4: you agree and close your HELOC, make sure you understand the interest rates, repayment terms, and any associated fees that come with taking out a HELOC so that you can avoid future surprises.

Getting A HELOC "Just In Case" Isn't Easy.

Ultimately, the decision should be based on your unique circumstances and financial goals. Remember, a HELOC can be a powerful tool when used wisely, but it’s not the only available option.

Evaluate your needs, weigh the pros and cons, Know how the timeline works, and prepare all the necessary documentation in advance, so if you’re getting a HELOC for an emergency purpose, you won’t forget anything out of a rush.

Lastly, consider seeking guidance from the best home equity loan companies to ensure you're making the most informed decision for your situation.