First let’s talk about what a HELOC is. It stands for Home Equity Line of Credit. It allows you to access the equity in your home as a loan against your property. It is not like a traditional 30 year fixed rate mortgage though where you the loan amount is set and you pay the same amount monthly until the term of the loan is done. A HELOC is a revolving line of credit that uses your home as the collateral if you don’t pay. The amount you can borrow is based on the difference between what you currently owe of your property and its market value. If approved you can withdraw the amount you need whenever you need it. You then pay an interest payment on the funds you withdraw.
A HELOC is split in to 2 terms. One that you draw the funds on and one to repay the loan. Typically the first term is 10 years. In those 10 years you can access your credit line anytime you like and only pay interest payments. After the 10 years your repayment begins. Typically this period with be 20 years. You want to be careful with HELOC’s because they are variable rate which means that although interest rates are low now you could get squeezed with higher interest rates in the future. HELOC rates are based on the Prime Rate which you can do a quick Google search for. The 2 term periods vary by state so you’ll want to see what is allowed in your state.
1. Ready cash when you need it
2. Debt Consolidation
3. Home Repairs
Have you thought about putting in a new kitchen or the garage door needs replacing? A HELOC is a great way to do some fixits around the house or a remodel.
4. Student Loans
5. Tax Benefits
One of the most overlooked and potentially dramatic savings is the possible tax advantages of a HELOC. In many cases the interest on your HELOC is tax deductible. Check with you tax advisor to make sure this is the case with your particular scenario. However, unlike credit cards, car loans, student loans or most other loans for that matter it is possible to deduct the interest on your tax return. That’s huge!!!
Before you jump in to a HELOC figure out a plan to pay it back because not only can interest rates go lower which would reduce your payment they can also go up which will increase your payment. If you find yourself in a higher interest rate and you are at the point where you have to pay principal and interest payments it can be a really big shock to you financially. HELOC’s can be good for your but can hurt if interest rates increase dramatically. A lot of institutions set a maximum that the interest rate can go up. Check with your lender before signing the dotted line. Also, this is a secured debt which means that if you don’t pay they can come and take your house away from you.