Just when you thought paying off your mortgage was hard enough, we’re here to tell you that taking out a “second” mortgage on your home could be beneficial. You might be wondering if you read that correctly. We promise that you did. As your friends at Black Hills Community Bank, we’re here to give you the 411 on HELOCs.
First, what is a HELOC (pronounced “hee-lock”)? It’s a home equity line of credit. You’re probably familiar with a line of credit (LOC). Either you have a checking account LOC that saves you by kicking in extra money when you (oops) forgot that your account balance was running low—or you pay off a credit card each month to maintain and bolster your credit line. Both situations are good examples of how to use a line of credit to your advantage. The key with any LOC is to pay back the funds you use as quickly as possible, which not only restores your available funds, but improves your credit score.
The same phenomenon occurs with home equity credit lines. What is home equity? It’s basically the difference between the value of your property and the amount you owe your mortgage lender (a.k.a., your good friends at Black Hills Community Bank). When you’re approved for a HELOC, you can borrow against your home’s equity to make large purchases or pay off debt. After you make payments, you can use the credit again as you need it.
“It may seem counterintuitive to incur additional debt by taking out a second loan that uses your home as the collateral,” said Jack Lynass, president and CEO of Black Hills Community Bank in Rapid City and Spearfish. “But using a HELOC can actually improve your credit in the long run, because the account appears on your credit report once you’re approved and you begin making payments.”
Lynass said additional benefits of HELOCs include debt consolidation; interest-only payments; and tax deductions. Your HELOC will likely carry a higher interest rate than your original mortgage loan, but your HELOC interest rate won’t be higher than credit cards or other personal loans. Plus, your HELOC lender will likely only require you to pay on your interest charges each month, not the principal. However, it’s important not to miss payments—because as we mentioned before, your home is your collateral. That means if you don’t pay, your home could be foreclosed upon. When tax season rolls around, you’ll be happy to be able to list your HELOC loan as a tax deduction. This isn’t possible with most other types of credit loans.
“Here at Black Hills Community Bank, we realize that financial jargon can be confusing for people,” said Lynass. “We offer several options to make planning fit your financial plans. It’s our goal to make the lending process as easy as possible. We’ll set an agreed upon term and give you all the information you need to succeed.”