If you’re looking to tap into your home’s equity for holiday expenses or home upgrades, here are some advantages of choosing a Home Equity Line of Credit (HELOC).
What is a HELOC?
A HELOC is an open credit line secured by the equity of the borrower’s home. Homeowners can generally open a HELOC with up to 90% of your home’s equity, or the difference between what’s left on your home loan and the current value of it. Use our calculators to determine your home’s equity.
HELOCs have a “draw” period, during which the borrower can access the available funds. That time frame generally ranges from 5-10 years. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 years.
Once approved for a HELOC, the funds can be taken out whenever you need it. Some plans may require the homeowner to borrow a minimum amount at each draw, keep a predetermined amount outstanding or withdraw an initial advance when the line of credit is first established.
A HELOC provides homeowners with a convenient way to use the equity in their home to fund a home renovation or expansion, but can also be used to cover any large expenses, such as a medical emergency, holiday expenses, a new business venture, a wedding or the purchase of a recreational vehicle.
Here are some of the primary advantages of a HELOC.
Easy access to funds as needed
A HELOC does not provide borrowers with a lump sum of cash. Instead, like a credit card that’s only used when necessary, the homeowner can withdraw funds from the HELOC as appropriate. This makes a HELOC a great option to pay for expenses when there is not a known price tag. Also, because the borrower is only paying interest on the money you actually withdraw, you’ll have the freedom to take out a larger line of credit and decide how much of it to use later on.
Qualify for a low Annual Percentage Rate (APR)
Interest rates continue to hover at all-time lows. Opening a HELOC now means qualifying for low interest rates on the line of credit. Most HELOCs have fluctuating interest rates, but some lenders allow for the possibility of converting large withdrawals into fixed-rate loans.
Terms and repayment plans for HELOCs are generally flexible. During the draw period, homeowners can withdraw funds from the HELOC as needed and use the money however you please. When the draw period ends, the homeowner may be allowed to renew the line of credit and continue using the funds as needed.
Low monthly payments
Many lenders only require borrowers to make payments toward the interest of the loan during the draw period. Once that time is over, the borrower will need to pay back the entire principal of the loan immediately in one “balloon payment,” or over the course of 15-20 years. This is especially beneficial if the borrower does not have the funds to pay back the loan now, but anticipates an improvement in your financial situation within the next few years.
The timeline for a HELOC can vary depending on the lender and on how much the homeowner wants to borrow, but HELOC terms can last up to 30 years.
Potential tax benefits
As per the Tax Cuts and Jobs Act of 2017, the interest paid on home equity loans and lines of credit is tax-deductible if the funds are used to buy, build or substantially improve the home of the taxpayer who is securing the loan. It’s best to consult a tax advisor for advice on whether or not you would qualify for this.
Increase your credit score
There’s no need for an excellent credit score to qualify for a HELOC, and on-time monthly payments can significantly boost a homeowner’s score.
A HELOC costs little or nothing to establish. Annual fees are also usually low, if any.
When life throws an unexpected curve ball or even a unique opportunity, a home equity line of credit can be a great option. With interest rates at record lows, taking out a HELOC makes more sense than ever.