Home Equity Line of Credit (HELOC) Pros and Cons: What You Need to Know
A home equity line of credit (HELOC) is a great way to access the equity in your home and use it for major expenses. But before you apply for a HELOC, it’s important to understand the pros and cons.
Here are some things to consider before you apply for a HELOC:
What are the interest rates and fees?
How much can you borrow?
What is the repayment schedule?
What are the tax implications?
What are the risks?
Now let’s take a closer look at each of these factors.
Interest Rates and Fees
The interest rate on a HELOC is usually variable, which means it can change over time. However, some lenders offer fixed-rate HELOCs.
The fees associated with a HELOC can vary depending on the lender, but they may include an origination fee, appraisal fee, and closing costs.
How Much Can You Borrow?
The amount you can borrow with a HELOC depends on the equity in your home. Most lenders will allow you to borrow up to 85% of your home’s value. So, if your home is worth $200,000, you could borrow up to $170,000.
With a HELOC, you usually have a 10-year draw period during which you can access the funds. After the draw period ends, you enter the repayment phase, and you’ll need to repay the loan over the remaining term, which is usually 20 years.
During the repayment phase, you’ll usually make interest-only payments. This means that your monthly payments will be lower than they would be if you were making principal and interest payments.
The interest you pay on a HELOC may be tax-deductible. However, this is subject to change, so it’s important to speak to a tax advisor to see if the interest on your HELOC is currently tax-deductible.
There are a few risks to be aware of when taking out a HELOC.
First, if the value of your home decreases, you could end up owing more than your home is worth. This is known as being “underwater” on your loan.
Second, if interest rates increase, your monthly payments could go up, making it more difficult to afford your loan.
Lastly, if you miss payments or default on your loan, you could lose your home.
Now that you know more about HELOCs, you can decide if this type of loan is right for you.