What are the Advantages of a HELOC?

Q: I’m looking to tap into my home’s equity, possibly using a Home Equity Line of Credit. What are some of the advantages of choosing the HELOC option?

A: A Home Equity Line of Credit (HELOC) is an open credit line that is secured by the borrower’s home. Homeowners can generally open a HELOC with up to 80% of their home’s equity, or the difference between the balance of their home loan and the current value of their home. A HELOC provides homeowners with a convenient way to use the equity in their home.

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 10-15 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:

Only borrow what’s needed. A HELOC does not provide borrowers with a lump sum of cash. Instead, like a credit card that is only used when necessary, the homeowner can advance 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 they actually advanced from the HELOC, they’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.

Monthly payments also 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 10-15 years. This is especially beneficial if the borrower does not 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 25 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.

Build a credit score. On-time monthly payments can significantly boost a homeowner’s score.

Low fees. A HELOC costs little or nothing to establish. Annual fees, if charged, 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 laws, taking out a HELOC makes more sense than ever.