A home equity line of credit — more commonly referred to as a HELOC — is one option for homeowners looking to tap into the value of their home for cash.
Unlike other options, though, HELOCs are a line of credit — allowing you to withdraw, repay, and then withdraw more funds again as needed over an extended period of time, much like a credit card. While this can be the right strategy for some homeowners, there are drawbacks, too.
1. You can withdraw funds indefinitely
One of the biggest benefits of a HELOC is that it allows you extended access to cash. Here at Ascent we do not limit the number of years you can draw on your HELOC. Once approved for a line, it will remain open until you choose to have it closed. This makes a HELOC great for covering recurring expenses (like tuition, for example) or unexpected repairs, medical bills, and other charges that might crop up in the future.
2. You only pay interest on what you borrow
Another perk of HELOCs is that you only pay interest on the funds you actually withdraw. If your credit line is for $50,000, but you only use $20,000, you’ll only be charged interest on that $20,000 — not the full line.
3. You can use the funds however you like
There’s no restriction on how you use the funds from a HELOC. Many homeowners use them for repairs and renovations, while others use them for expenses completely unrelated to their home — like taking a vacation or consolidating credit card debt.
4. High loan limits
Depending on how much equity you have in your home, HELOCs can potentially offer access to very large sums of money. How much you ultimately qualify for will depend on how much equity you have and your credit score.
5. Payments based on percentage of the unpaid balance
At Ascent, because we do not restrict the draw period, your payment is based on a percentage of the unpaid balance. Your payment can range from .075% to 1.5% of the outstanding balance depending on the rate you qualify for.
6. Interest may be tax deductible
In some cases, you may be able to deduct your HELOC’s annual interest costs on your federal tax return. This is only the case if you use the borrowed funds to “buy, build, or substantially improve your home,” according to the IRS, so keep this in mind if you’re aiming for a tax deduction.
1. Rates are variable
HELOCs have variable interest rates, which means the rate you’re charged can change based on where current HELOC rates are at. Typically, these rates are tied to the prime rate. When that rate rises or falls, the rate on your HELOC does, too.
2. Your home is on the line
HELOCs use your home as collateral by placing a lien on the property. While this can alleviate some of the risk for the lender and allow it to offer lower rates and more favorable terms, it’s also risky. If you don’t make your payments, the lender can foreclose on your house to repay the debt.
If you have any questions about HELOCs, feel free to give our mortgage experts a call at 801-399-9728.
Article adopted from businessinsider.com