If you're a homeowner, a home equity line of credit (HELOC) can be a convenient way to put the equity in your home to good use. It's an open credit line that's secured by the paid value of your home. You can generally open a HELOC equal to 80%-90% of your home’s equity.
HELOCs have a “draw” period, during which you can access the available funds. Once the draw period ends, it’s typically followed by a repayment period for a set term.
What makes a HELOC helpful is its flexibility. Once you have the line of credit set up, you can draw down as much or as little as needed by using a credit card connected to the account. And you only make payments on the amount you actually use — not the total amount of credit available.
HELOCs are often used to fund a home renovation or expansion, but they can also be used to cover any large expense, like a medical emergency, 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 doesn't provide borrowers with a lump sum of cash. Instead, you withdraw funds when you need them, like you would with a credit card. Also, because the you only pay interest on the money you actually withdraw, you have the freedom to take out a larger line of credit up front and decide how much of it to use later on.
Qualify for a low Annual Percentage Rate (APR). HELOCs are tied to the prime lending rate and fluctuate in response to market conditions, which makes them a better and more economical way to borrow in the current low-rate environment.
Flexible terms. Terms and repayment plans for HELOCs are generally flexible. During the draw period, you can withdraw funds from the HELOC as needed and use the money however you please. When the draw period ends, you may qualify to renew the line of credit and continue withdrawing funds when you need them.
Monthly payments also vary. Depending on the type of HELOC (and your lender), payments include both repayment of the loan principal plus monthly interest on the outstanding balance. Some HELOCs allow you to make interest-only payments for a set period of time (the draw period), after which a repayment period begins.
Potential tax benefits. According to the IRS, the interest paid on home equity loans and lines of credit may be tax-deductible if the funds are used to buy, build or substantially improve the home of the taxpayer who is securing the loan.*
When life throws an unexpected curveball or even a unique opportunity, a home equity line of credit can be a great option. That's especially true with today's low interest rates.
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