There are a couple of choices for homeowners who want to do some remodeling or renovations around the house but don’t have enough cash in their accounts to do it outright. Many will turn to finance options that utilize the equity their homes have accrued since they bought them, but there are definitely some pros and cons of a HELOC (home equity line of credit) that they should be aware of. Whether planning a home improvement project or needing the funds to consolidate high-interest debt, a HELOC is a good way to cover the costs of a project or charge without having to take out a whole new loan.
Rivermark Community Credit Union has both HELOC and home equity loan options, depending upon what you’re looking for. Reach out to us today to discover which is best for you and how to get the application process underway.
Home Equity Loan vs. a HELOC
If you’re not sure how much you’re going to need to cover the costs associated with your upcoming project, then a HELOC is your best bet. While a home equity loan offers a lump sum, a HELOC is a line of credit from which you can borrow against as you need to. Think of it a bit like a credit card. Even though you have a maximum, you wouldn’t use all of it at once if you didn’t need to. A home equity loan may be the right choice for some, but a HELOC offers borrowers an easier way to access money as they need.
Some of the pros and cons of a HELOC can be reviewed below. Remember, there’s no such thing as free money, and as such, the money you’re using for your debt consolidation or improvement project is still tied into the equity of your home, so use it wisely.
Home Equity Line of Credit Pros
The maximum amount you’re eligible to borrow from a home equity line of credit is linked to the value of your home. Most of the time, it’s as high as 85 percent of your home’s value, so in order to get approved for this type of loan, it’s best if you have actually have enough equity built into the home. Additionally, lenders require that you have good credit so they know they’re not just going to lose money. Again, the loan is tied into your home, with your home as collateral for the amount you use.
Some of the biggest advantages include the competitive interest rates, the repayment terms, and even the flexibility of using a portion of the loan maximum.
We’re at a point in time with the housing market where interest rates are lower than they have been in years. A home equity line of credit can give you the opportunity to take advantage of this. Some HELOCs even have lower interest rates than credit cards.
Take Advantage of Tax Benefits While Still Redoing Your Home
Depending on how you use the home equity line of credit, you may be able to write off the interest paid on the loan. That is, if you’re using the funds specifically to revamp your kitchen, upgrade your bathroom, add a jaw-dropping garden, or rebuild anything else that qualifies under home improvements, then the interest you will have paid can be tax-deductible.
According to the IRS website, the home equity products cannot be claimed as a tax deduction “unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.” So if you’re hoping to make some noticeable changes around your home, you may qualify for this program.
When presented with a lump sum, you can get lost in the “potential” of that money and not budget as well as you should. With a home equity line of credit, you can take out just what you need when you need it, which can save you hundreds (if not more) in the long run. By taking the time to plan things in advance, you may be able to use less than you would with other home equity products, and that equates to a smaller monthly payment in the end.
There is an option to just make interest-only payments initially with many HELOCs, so that may be something to look into. There are varying repayment timelines for a HELOC, but in general, they can last up to 30 years, and that includes both the time when you’re drawing on and repaying the loan.
Cons of HELOCs
Take these cons into consideration before making a final decision.
Your Home is Collateral
Although having a secured loan can mean a lower interest rate, it’s still important to give this sort of decision a good, hard think. Putting your home up as collateral for a loan means you have to be a smart borrower and able to pay back the loan’s monthly payments. A HELOC can be a risky option for someone who isn’t diligent in their borrowing choices.
Variable Interest Rates
A HELOC does vary from a home equity loan in interest rates. While a home equity loan can give you a fixed interest rate, a home equity line of credit cannot. There will be a variable interest rate, and it means that your interest rate will be subject to what the Federal Reserve decides to do with prime and loan rates. This can be good or bad.
Equity in Your Home Will Decrease
Last, but certainly not least, you’re borrowing against your home. This means the value you’ve “accrued” over time and the worth of your home goes down once you’ve taken out a home equity product. While it means it may take longer to pay off the house in the long run, the flip side is that you’re investing in the home itself and may be able to say it’s increased in overall value. If the housing market crashes, however, there is a chance that you may end up owing more for the house (and loan) than the house is worth.