How Does a HELOC Work? Part 4

Frequently Asked Questions About HELOCs

Will a HELOC affect my Credit Score?

Yes, a HELOC can have both a positive and negative impact on your credit score. Whenever you apply for new credit, you will incur a hard inquiry, which initially lowers your credit score. However, the HELOC will decrease your credit utilization, diversify the type of debt, and show payment history with on-time payments. These three things alone can drastically improve your credit score.

Is a fixed Home Equity Loan better than a HELOC?

A home equity loan is a lump sum fixed-rate loan with fixed payments over a predetermined term. A home equity loan is great when you need a specific amount of money upfront and you’re able to make fixed principal and interest payments each month.

If you’re looking for a line of credit that you can draw on at any time, then a HELOC is a better alternative to a home equity loan.

Summary

A home equity line of credit is a great way to utilize the equity in your home. For some, it’s trading a high interest rate for a lower interest rate. Others may use it as an emergency fund and some will increase the value of their home through home improvements.

However you decide to use your home equity line of credit, the most important step is to have a plan for your HELOC before you apply.

Check out the other posts in the How Does a HELOC Work? blog series!

Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.