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What Is A Home Equity Line Of Credit (HELOC)

There are a lot of different types of loans that you can take out if you need money, but if you are a homeowner, then you may want to consider taking out a home equity line of credit (HELOC).

A home equity line of credit is a loan against the equity that you have in your current home. However, a HELOC isn’t quite as straightforward as your typical loan.

How Does a Home Equity Line of Credit Work?

In order to get a HELOC, you will need to have equity in your home. The more equity you have, meaning the less you have left to pay on your mortgage, the larger your HELOC may be.

Generally speaking, most lenders will give you a line of credit that’s up to 80 percent of your home’s value minus the balance that’s remaining on your mortgage. However, lenders will require that you have at least 10 to 20 percent in equity even after you take out a HELOC.

An option that often gets confused with a HELOC is a home equity loan. With a home equity loan, you’ll be given the loan in full, right away. A HELOC is different in that it allows you to take money when you need it, rather than as a lump sum, hence the term line of credit.

As an example, let’s say you’re granted a $50,000 HELOC. You can choose to simply take $10,000 from that amount if that’s what’s best for you. It’s basically a revolving credit line that works in a similar way as your credit card. In fact, borrowers are often able to use a credit card or checks to use the credit that’s available in their HELOC.

Because a HELOC is basically a revolving line of credit, it means that when you make payments, you only have to make payments on the amount that you actually took out, not the full amount that’s available to you.

The Benefits of a Home Equity Line of Credit

There are a lot of benefits to choosing a HELOC over other loan options, such as a home equity loan or a personal loan. The following are some of the benefits of taking out a home equity line of credit:

Low interest rates

Lenders typically charge a variable interest rate that starts near the prime rate and then gets adjusted according to your credit score (as well as other factors). Even then, the interest rates on a HELOC are often significantly lower than those on other loans.

They offer a lot of flexibility

The ability to only have to make payments and pay interest on what you actually use from the credit line gives you a lot of flexibility in the way that you can use your credit. Additionally, you can choose to pay off your interest first before paying off the principle.

While this can make it difficult to regain equity in your home, it does allow you to make much smaller payments at first, giving you a chance to increase your income before you begin paying off the principal.

Interest is tax deductible

Any interest that you pay on your HELOC is actually tax deductible. However, to qualify for these deductions, you must have less than $50,000 in HELOC debt (or less than $100,000 if you are married).

This can be particularly beneficial if you are choosing a payment plan in which you are paying off the interest before you begin paying off the principal – depending on what your current financial situation is like.

You can improve your credit

Your HELOC account will appear on your credit report as soon as you begin making payments. This means that the payments you make will help to boost your credit score. Charging less than 30 percent of your HELOC’s spending limit can also help to improve your overall credit rating.

Ways to Use a Home Equity Line of Credit

There are a number of ways that taking a HELOC out can be extremely beneficial. The following are just a few ways that you can put your HELOC to good use:

Renovate your Home

A lot of homeowners will take out a HELOC in order to pay for home renovation work. Not only can improving your home help make it more liveable, but it might help increase its value as well. Depending on the renovation, the value that it adds to your home could end up paying for itself – and perhaps even allow you to make a profit if you end up selling your house.

Pay for College

It can be difficult to secure student loans at a favorable interest rate. In many cases, HELOCs will have better interest rates than the student loan options that are available. You’ll probably also have access to more money than a student loan usually provides. This can be especially helpful since you could take money from your HELOC to not only pay for tuition, but also for school supplies.

Invest in the Stock Market

There is some risk involved with taking the money you have access to in your HELOC and investing it, but if you do so carefully and intelligently, it could yield big rewards. And you don’t exactly have to strike it rich either – if you are able to make sound investments that see even as little as an eight percent return, that could cover the interest as well as net you a small profit.

Consolidate Your Debts

If you have a lot of different debts in different places, from student loans to credit card debts to personal loans, then consolidating them and using your HELOC to pay them off can be a good idea. You could end up saving a lot of money in interest by doing this – and consolidating all of your debt will make it easier to track.

Pay off Credit Card Debt

Credit cards tend to have extremely high interest rates, especially when compared to other types of interest. Because your HELOC will have a much better interest rate, you can use it to pay off your credit card debt and save money on interest over the long run.

Just be wary of falling into the trap of thinking that you can start using your credit cards more freely again. You could end up getting caught in a vicious cycle of debt.

Take Advantage Of A Home Equity Line of Credit

As you can see, there are a lot of advantages to taking out a HELOC, especially when you consider the ways in which you can use it.

If you think a HELOC may be right for you or you want more information, contact Al-Gar Federal Credit Union online or call us at 800-750-1070.