I wanted to share some great advice about HELOCs from our friends at Nerd Wallet ^Amy
Whether you need extra cash for home improvements, to consolidate credit-card debt or pay for medical expenses, a home equity line of credit (HELOC) may be your lowest-cost borrowing option this year.
Besides low interest rates, this mortgage product provides a number of advantages, including potential tax savings, low fees and borrowing flexibility.
What is a HELOC?
A home equity line of credit lets you borrow against the available equity you have in your home, or its fair market value minus whatever is owed on any mortgages tied to it. A HELOC is a form of revolving credit, usually with a lender-set time limit and a variable interest rate on the money borrowed.
If you’re approved for a HELOC, the maximum you can borrow will be based on the equity in your home. For example, Tropical Financial Credit Union finances up to 90% of the property value minus the first mortgage. So if your home is valued at $200,000 and you owe $120,000 on the mortgage, your equity is $80,000 and you may be able to borrow as much as $60,000 ($200,000 x 90% = $180,000 - $120,000 = $60,000).
The credit line you receive comes with a draw period, which is the length of time during which you can use the HELOC funds. The period typically lasts from five to 15 years and at Tropical Financial the draw period is ten years. You can use and repay as much of the HELOC as you like during this period. After that you will have a repayment period - at Tropical that period is ten years. During that time you can focus on repaying the outstanding balance, thus regaining your equity.
Here are some other potential benefits of HELOCs:
HELOCs offer a convenient way to make use of the equity you have in your home when you need it, and if you don’t use it, you won’t pay any interest. This distinguishes HELOCS from second mortgages, home equity and personal loans, that provide advances on which repayment often must begin immediately
Low interest rate
Since you are using your home as collateral, the initial rate you’ll pay is likely to be significantly lower than a personal loan. However, remember that today’s rates, which remain near historic lows, are unlikely to persist for a decade, and in time you may end up paying a significantly higher rate on what you borrow. Ultimately, the terms for your HELOC will depend on factors that include the amount made available, your history as a borrower, credit score, work history, income and other debts.
Potential tax break
The interest you pay on money borrowed through a HELOC can be treated like mortgage interest to reduce your federal tax bill. This aspect also distinguishes these products from personal loans and credit card debt, neither of which provide tax benefits. Consult with a tax adviser to determine your specific situation.
Given these advantages, a HELOC may be your best option if you’re a homeowner in need of some extra cash.
Steve Nicastro, NerdWallet