If you’re a homeowner these days, you can seriously turn the equity you have in your property into cash, and at low cost. This is chiefly due to the substantial hike in home prices. One popular way to cash in on your equity is through a home equity line of credit (HELOC), which is like a credit card you can use, at will, for … whatever. But as with any such tool, there are benefits as well as caveats. Here are the pros and cons of a home equity line of credit.
What is a Home Equity Line of Credit?
It’s a secured loan that uses your house as collateral and, as we say, functions like a credit card. With it, you’re permitted to continuously, and for practically any reason, draw from a revolving line of credit. Any amount is permissible, up to your limit, and you’ll just pay interest on what you spend.
How Does a HELOC Work?
During what’s called a draw period, which is usually 10 years, you can pull money from your HELOC. You’ll then have 20 years to replace the amount you spent. Note that your rate will be variable, meaning it will fluctuate during the life of the loan.
What are HELOC Advantages?
Low Rates
HELOC interest rates are generally low relative to credit cards or personal loans. Just how low will depend on your credit score. According to Next Advisor, the average interest rate for a $30,000 HELOC in August was pegged at 6.5 percent. Compare that to credit cards’ average APR of 15.13 percent, and personal loans’ average rate of 8.73 percent. Your HELOC rate won’t likely ever rise to those levels.
Just Repay What You Spend
Unlike other home equity financing options, HELOCs only require that you pay back what you spend, with interest. This feature well suits expansive for which the full price is yet unknowable, since so many variables can come into play.
The Loan Purpose is Up to You
It’s worth reiterating that you can use HELOC funds for whatever you wish, including for debt consolidation, medical bills, and yes, for home improvement. The latter for which you can get a tax credit.
You Can Get More
Since a HELOC will be secured by your home, the lender isn’t as concerned about risk. It could sell the property should you default. Thus, you can usually get a bigger loan amount than you could with plastic or a personal loan, depending on the amount of equity you have in your home. What you need is a great HELOC calculator tool to figure out how much you’ll likely qualify for and what your payment might be.
Promotional Offers
Some lenders will try to drum up business with introductory offers of, say, a lower rate or waived fees for a certain period. This is all good, and you’re sure to save money, but be certain you know when the rate is expected to go back up.
Drawbacks
Closing Costs and Fees
There is a myriad of possible fees – attorney, appraisal, transaction, annual, etc. – so make sure you know which ones your lender charges.
Variable Rate
Yes, the interest rate can fluctuate, but as we’ve mentioned, even when it rises, it’ll still likely be under that of credit card and personal loan rates. There’s always a chance such variability could render your payment unaffordable, although most HELOCs have an interest cap that mitigates concern over wild rate shifts.
Established Draw Period
You’ll be able to draw from your HELOC for a set time – usually 10 years. Once that draw period ends, it’s exclusively repayment time. For that reason, it’s widely recommended that you start making payments on the principal during your draw phase.
You Could Forfeit Your Home
Yes, it must be made clear that for all the benefits of HELOCs, you could lose your home if you fail to make payments. Don’t do that.
Use these pros and cons of a home equity line of credit to see whether this home equity financing option is right for you.