For homeowners, one of the most popular options is to take out a home equity line of credit or HELOC loan. An equity line of credit is a credit line similar to a credit card, but your credit line in this case is the equity in your home. As you need the cash for various purposes, you are able to draw it out of your home as you need it, up to a certain limit.
Once you apply for a HELOC and are approved, the lender will give you either a check book or a debit card and you take the money out as it is needed. You will only pay interest on what you take out, and you are limited only by the total credit line you are given.
HELOCs are a great way to access your home’s equity for things that you need in your life. Here are some of the big advantages of home equity credit lines:
#1 Low Initial Interest Rate
HELOCs have an initial draw period where you have a low interest rate and you are paying interest only on the loan. In most cases, the home equity line of credit rates are considered low when coming it to conventional mortgage rates. Note that the interest rate is variable and it could possibly rise. The initial rate on a HELOC is often quite low as it may be an introductory period rate, but it can rise in the future.
#2 You Have Years to Draw the Money Out
One of the big benefits of a HELOC is that you only need to take money out and pay interest on it as you need it. So you are not paying interest on money that is just sitting in your bank account for several months. A home equity credit line is a good choice for a use or project that you need to fund over time. Most of the time homeowners appreciate the fact that with a home equity line of credit, the minimum payment is interest only. This is great for cash flow, but at some point, borrowers will need to start paying the HELOC loan back.
A popular use of a home equity line of credit is to fund a college education. You will need to make tuition payments over several years. You will be able to pull the money out of your home over 5-10 years, whatever the draw period is on your credit line.
#3 Interest Is Tax Deductible
Most homeowners are able to take advantage of the mortgage interest tax deduction, and write off the interest on their mortgages. This tax deduction is very popular and it should be because it saves people hundreds or thousands on their tax bill every year.
Interest paid on most other types of loans is not tax deductible.
#4 Interest Rate Is Lower Than Other Loans
In most cases, a home equity credit line rate will have a higher interest rate than your first mortgage, but it is a collateral based loan, so the interest rate will always be lower than a credit card or a student loan. If you are pulling out cash to pay off credit cards or pay for a student loan, you will be paying a lower interest rate, which again, is tax deductible interest.
#5 HELOC Provides You with Emergency Cash
Some people like to get a HELOC loan just so they have cash available in an emergency. If you are the sort of person who wants to have peace of mind by having money available in an emergency, a home equity credit line is a good thing to have handy.
#6 Your Credit Score Has Less Effect
Usually you need to have good credit to get a home loan, but your current credit score will not have as much of an effect on your ability to get a loan. The home is collateral for the loan. If you don’t pay, the lender will take the home after a few months. But for many people who need cash and have equity, not having to worry too much about credit scores is helpful.
Generally to get a HELOC, the bank will just require a current appraisal and verification of your income.
#7 Loan Process Is Faster
When you got your first mortgage, you might remember a long process of two months or more to get your loan. That is because the loan had to go through a full underwriting and documentation process that can take 60-90 days and even more.
But with a home equity line, you are just going to need income verification and an appraisal. This means that you can get your money in a matter of a few weeks.
#8 Many Choices of Lenders
After the financial crisis, lenders were offering a lot fewer HELOCs, but now there are more lenders offering them. We recommend that you visit a credit union and a mortgage broker at least to help you secure the best possible home equity line of credit rate. It will always pay for you to shop around.
There are many great advantages of home equity lines of credit. Used properly, you will have ready access to tax deductible cash that you can use for whatever you want. And, the interest rate on it will be lower than you would pay on most other loans.