A home equity line of credit (HELOC) is a financial tool available to homeowners who have equity in their home. Although it is an option for most people, the advantages vary from person to person. A HELOC is similar to a home equity loan, but instead, the loan is in the form of a line of credit. There are advantages and disadvantages of a home equity line of credit. You should considered these factors before you decide if it is right for you.
Advantages of a Home Equity Line of Credit
A HELOC allows a person to take out money whenever they need it, which is an option that not many loan types provide. With this distinguishing feature, a person can get the money whenever they need it up to a certain limit.
Great Payment Options
A HELOC provides an alternative to making payments only on the interest every month, which could be a convenient solution for people who do not want to repay the principal amount until later.
In most cases, individuals with a HELOC debt are eligible to claim the interest rate they pay as a tax write off. However, it is wise to consult with a tax expert to make sure that you are eligible for tax benefits.
Improved Credit Report
Once a person starts making HELOC payments, timely and complete payments can contribute toward building a good credit score and ultimately a better credit report.
HELOC loans come with comparatively lower closing costs and other additional fees, as compared to other loans. With some lending institutions, there are not even application or appraisal fees.
Disadvantages of a Home Equity Line of Credit
Adjustable Interest Rate
A HELOC doesn't provide the peace of mind associated with a fixed rate mortgage. There is always a chance that the interest rate could increase and in that case, you would have to make payments on the increased interest rate.
HELOC loans are not capped (except lifetime caps) the way the fixed loans are. There is no limit to how much an interest rate might rise. Escalated rates can make it difficult to repay the principal amount.
The risk of financial constraints is common in the case of HELOC loans because even a slight change in the interest rate can impose noticeable effects on a monthly budget.
Difficult to Manage
Although HELOC loans come with an option to make interest-only repayments for a few years, which can seem beneficial, it can cause a financial challenge in the long run.
A low-interest HELOC might seem to be an easy alternative for the time being. But as a person extends his repayment period to a specific number of years, the amount of money that needs to be paid back can become higher than expected.
Some people take advantage of low-rate HELOCs for the purpose of refinancing their loans, but this might not make any difference because the interest rates are variable, and they might rise sometime in the future.
There are some pros and cons associated with a home equity line of credit (HELOC), but what matters the most is the financial situation of the person getting a loan. If you have a confidence in your earning ability, then it might be a bit easier to predict whether a home equity line of credit is going to be a good choice or not. Also, do be afraid to consult your financial institution for guidance.