Q: What are some of the advantages of opening a Home Equity Line of Credit (HELOC)?
A: A HELOC is an open credit line that is secured by the paid value of the borrower’s home. Homeowners can generally open a HELOC with up to 85% of their home’s equity, or the difference between what’s left on their home loan and the current value of it.
HELOCs have a “draw” period, during which the borrower can access the available funds, ranging from 5-10 years. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 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 HELOC is first established.
Here are some of the advantages of a HELOC:
Only borrow what’s needed. A HELOC does not give borrowers a lump sum of cash. Instead, it offers a homeowner the freedom to withdraw funds from the line of credit as needed.
Qualify for a low rate. 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.
Flexible terms. Terms and repayment plans for HELOCs are generally flexible. Many lenders only require borrowers to make payments toward interest during the draw period. Once that time is over, the borrower must pay back the entire principal immediately, or over the course of 15-20 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. There’s no need for an excellent credit score to qualify for a HELOC, and on-time monthly payments can boost a homeowner’s score.
Low fees. A HELOC costs little or nothing to establish. Annual fees are also low — usually less than $100.