HELOC or home equity line of credit is available for you whenever you need it. It is a secured form of credit, and the lender will use your home to guarantee the loan. As it is a revolving credit, you can keep on borrowing (and repay the interest-only repayment during the draw period) for as long as your credit limit allows you to.
One of the benefits of having a HELOC is that you only pay interest payments during the draw period. When you pay back the principal, it goes back to your credit line, and you can build equity over time. Equity that you can use for anything – medical bills, house renovations, or tuition. There are pros and cons when it comes to your HELOC, so it is always best to understand the big picture before plunging into it.
Pros of HELOC.
- Financial flexibility. You are free to use the money on whatever your needs are.
- Freedom in repayment. For the draw period, which is usually ten years, you only pay for the interest. So you can keep on using your credit line and not worry too much about significant repayment figures.
- Closing costs. Whenever applicable, closing costs are generally smaller compared to one-time loans. Interest rates are usually adjustable, but caps in rates are available, and even fixed rates are possible for a specific time.
- Tax benefits. HELOC interests can be tax-deductible. Up to $100,000 of the loan is tax-deductible as well.
Cons of HELOC.
- Irresponsible use can lead to more considerable debts. Let’s face it because it seems you are not paying a substantial amount regularly, you may be tempted to rack up debts if you are not aware of your spending habit.
- Possibility of foreclosure. On a HELOC, your home is your equity, and by not paying on time.
- Variable rates. Rates can go up and down, depending on the dictates of the market. Because of this, what you pay for this month, may be different in the following months.
So if you are thinking about a HELOC, researching about it is the best thing to do. Our colleagues can help you understand the terms of your HELOC so that you are fully aware of what your best options may be.