A home equity line of credit, or HELOC, is a type of revolving credit line that is secured using your home as collateral and the amount of credit you qualify for will be based on the amount of equity you have. A home equity line of credit can be useful if you're planning a large project, such as a home renovation, or if you need ready access to cash in case of an emergency.
Flexibility
A home equity line of credit is appealing to many homeowners because it offers a certain amount of flexibility in terms of how the money can be used and how easily it can be accessed. A home equity line of credit may be used at your discretion and funds may be used towards vacations, education expenses, home repair projects or to consolidate debt. Funds in a home equity line of credit are accessed through checks and since a home equity line of credit is revolving, your available credit increases as you pay down the outstanding balance.
Interest Rate
The interest rate you pay for a home equity line of credit are variable rates and are based on the prime rate, which means you will typically pay lower interest for a home equity line than for a traditional mortgage or other consumer loan. Another advantage of home equity lines is that depending on your credit rating, you may be able to convert to a fixed-rate home equity loan, which is less flexible but may offer lower payments.
Repayment
The repayment terms for a home equity line of credit vary and offer a certain amount of flexibility in how long you have to repay what's owed. Depending on your lender, you may be required to make payments towards the principal or you may be allowed to make interest-only payments. Your monthly payment is tied to the amount you owe and your interest rate and repayment may last from five to 20 years. In addition, some lenders may allow you the option of renewing your line of credit at the end of the repayment term.
Lower Fees
Although obtaining a home equity line of credit may require you to pay closing costs or fees associated, these fees are often lower than those involved with a traditional home equity loan. Depending on your credit history and income, your lender may choose to waive the closing costs altogether. In addition, with a home equity line of credit, there are no account maintenance fees, such as check writing or withdrawal fees.
Tax Deductibility
With a home equity line of credit, you may be able to deduct the interest paid from your federal income taxes up to $100,000 or the amount of equity in your home, depending on which is less.
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