A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, you can get a card to use on the account. You are pre-approved for a certain spending limit and can withdraw money when you need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.
Benefits for Consumers
Home-equity loans provide an easy source of cash. The interest rate on a home-equity loan – although higher than that of a first mortgage – is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.
The Right Way to Use a Home-Equity Loan
Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home-equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a college.
Should You Tap Your Home’s Equity?
Food, clothing and shelter are life’s basic necessities, but only shelter can be leveraged for cash. Despite the risk involved, it is easy to be tempted into using home equity to splurge on expensive luxuries. To avoid the pitfalls of reloading, conduct a careful review of your financial situation before you borrow against your home. Make sure that you understand the terms of the loan and have the means to make the payments without compromising other bills and comfortably repay the debt on or before its due date.
With a Home Equity Line of Credit (HELOC) you can borrow against the equity you’ve built up in your home.
- Since it’s a line of credit you only need to apply once
- Make advances as you need money
- You may enjoy a tax benefit. Check with your tax advisor