Tap into your home’s equity using a Home Equity Line of Credit.
A Home Equity Line of Credit (HELOC) is an open revolving credit line that’s secured by the paid value of your home. Homeowners can usually open a HELOC with up to 85% of their home’s equity, or the difference between what’s left on their home loan and the current value of it. HELOCs tend to provide homeowners with a convenient way to use the equity in their home to accomplish different home projects.
HELOCs have a “draw” period, during which time 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, borrowers can spend the funds however they choose. 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.
HELOCs are often used to fund a home renovation or expansion, but they can also be used to cover any large expense, such as a medical emergency, a new business venture, a wedding, a dream vacation, an adoption, or the purchase of a recreational vehicle.
Here are some of the primary advantages of a HELOC:
You only borrow what’s needed
A HELOC doesn't provide borrowers with a lump sum of cash. Instead, like a credit card, the homeowner can withdraw funds from the HELOC as needed. 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 they actually withdraw, they’ll have the freedom to take out a larger line of credit and decide how much of it to use later on.
You might 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.
HELOCs have generally flexible terms
During the draw period, homeowners can withdraw funds from the HELOC as needed and use the money however they please. When the draw period ends, the homeowner may be allowed to renew the line of credit and continue withdrawing funds as needed.
Monthly payments will vary
Many lenders only require borrowers to make payments toward the interest of their loan during the draw period. Once that time is over, though, 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 doesn't have the funds to pay back the loan now, but anticipates an improvement in their 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.
You can gain 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.
A HELOC can help build a 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 low — usually less than $100.
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.