8 Reasons to Pursue a HELOC
Have you ever wished that you had a more substantial backup plan for your finances—one that you could really count on, control and manage — all without detracting from your other financial responsibilities? If you’re a homeowner, a home equity line of credit (HELOC) could be just what you’re looking for. You get access to a significant level of funds for an extended period of time, with the power to decide when and how you use that money.
But Really, What’s So Special about a HELOC?
A HELOC, or home equity line of credit, is essentially a revolving credit account with an upper limit just like a credit card. The difference is the limit is tied to the value of the equity you have in your home. You can use the whole amount, a portion of the amount or none of it, and you make monthly payments based only on the portion you actually use.
A HELOC can be a valuable financial resource when used wisely. Homeowners like them because of their versatility and the advantages they offer versus other types of loans and credit cards.
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A HELOC can be a valuable financial resource when used wisely. Homeowners like them because of their versatility and the advantages they offer versus other types of loans
Here are a few perks to keep in mind
- HELOC credit lines allow you to borrow large amounts of money. While a credit card may set your credit limit at a few thousand dollars, a HELOC’s upper limit typically equates with about 80 percent of a home’s value minus the balance owed to the mortgage holder. On a home valued at $300,000, with $100,000 still outstanding, that figure could be as high as $160,000.
- HELOCs let you decide when, how and whether to use the funds secured. Once you open your HELOC, you have access to your credit line’s full amount. You can use what you need, but your payments are based only on what you actually use. If you need $20,000 of your $140,000 available, for example, payments are calculated only on the $20,000, not the other $120,000 that you haven’t touched.
- HELOC interest rates are usually lower than credit card interest rates. Credit cards tend to have higher interest rates because they are unsecured debt. With your home’s equity serving as collateral, HELOCs usually come with lower interest rates than what you’d pay on most credit cards—a real advantage when you take into account the higher sums of loaned money involved.
- HELOC interest for qualified home improvements stays tax-deductible in most cases. For example, if you need $50,000 to add an in-law suite to your home, the resulting $2,000 or so in interest could go toward your itemized tax deductions. Always consult your tax professional to see what applies to your specific situation.
Once you open your HELOC, you have access to your credit line’s full amount. You can use what you need, but your payments are based only on what you actually use.
- HELOCs allow you to consolidate debts on more favorable terms. The higher amounts of credit available with a HELOC, the lower interest rates, and the longer draw and repayment terms eliminate the problem of multiple high-interest credit card bills demanding payments at the same time.
- HELOCs can balance cash flow for short-term, large-ticket debts. Financial timing can be an issue for large expenditures even though you know they’re inevitable. For example, you may have money set aside for an expense, but you just don’t have access to it yet without penalties — an IRA, for example, for educational expenses. A HELOC could help you pay that tuition now, and then pay off the HELOC when you have access to other funds, without penalties.
- HELOCs are designed to handle multiple expenses over the draw period. One month, you may need $8,000 to pay medical expenses. Six months later, you may need another $13,000 for a new roof. A year later, you may need another $4,000 for an engine overhaul. A HELOC comes with disbursement options that let you pay for whatever you need.
- HELOC funds are available at any time. Costly crises have a habit of striking when you least expect. With a HELOC, the funds in your line of credit are already approved and available for your use. As long as the amount is within your line of credit’s limit, it’s yours to use as you see fit.
Bottom Line
A HELOC can be a smart way to borrow a large amount of home equity now. But it will need to be thoroughly researched and understood before formalizing an application. Consider using this month to shop around to compare rates and terms, compare it to what’s available with a home equity loan and, perhaps most importantly, be realistic and cautious with your expectations for the broader interest-rate climate. By making these moves now, you’ll better improve your chances of home equity borrowing success, both immediately and over the long term.
If you have any questions about this matter, please do not hesitate to contact us at (305)-851-5225 or talk to one of our loan officers. We will be happy to assist you.
This article was originally published in LA Capitol Federal Credit Union www.lacapfcu.org
