A Home Equity Line of Credit, or HELOC, is a line of credit available to most homeowners with equity. While many homeowners have likely heard about this type of loan, some may not be completely familiar with how it works.
Your home is your collateral.
The most important thing to understand about a HELOC is that it uses your home as collateral. Therefore if you default on this line of credit, your home may be at risk. At the same time, you are able to borrow more money. Typically, a HELOC lets you borrow up to 85% of your home’s value, minus the amount you owe on your mortgage.
Flexible spending with a line of credit.
A HELOC is a line of credit, meaning you will have a credit limit given to you based on the equity available in your home along with other underwriting criteria. The difference between a HELOC and a credit card or other personal line of credit is that you are given a “draw period” during which you can borrow or repay on that line whenever you want. Once the draw period ends, you must then repay the balance during a specified term.
Possible tax deduction.
A HELOC is one of the few credit options available where you may be able to deduct the interest you pay on your taxes. It is important that you check with your tax advisor as to whether or not you qualify for this benefit.
Impact to your credit score.
While a HELOC acts a lot like a credit card, it may not look like one on your credit score. Borrowing your full HELOC limit may not have the same negative effect as maxing out your credit card.
The Reasons to Use Home Equity
- Major home renovations. Typically, major home renovations require large amounts of money—whether you’re putting in a pool, adding on to your home, or remodeling your kitchen. A home equity loan allows you to pay one lump-sum for the renovation, while a home equity line of credit (HELOC) gives you the option to make interim payments over time depending on the need of your contractor or other vendor.
- Pay for college expenses. Did you know you can use the equity in your home to pay for college? Use a home equity loan to pay for everything upfront for the year, or take out a HELOC and use it for expenditures throughout each year. Rates are usually lower than student loan rates, which saves you money over time. However, you’ll have to make payments on that loan immediately as opposed to a student loan that doesn’t require payments until after graduation.
- Consolidate your debt. Many people choose to consolidate their debt into one lump-sum payment using a home equity loan or HELOC. In many instances, the rates will be lower (especially if you’re consolidating a credit card or personal loan), and you’ll be able to make one payment each month instead of multiple payments for multiple accounts.
Although you can use your home’s equity in various ways, be aware that any way you use a home equity loan or HELOC puts your home at risk. Stay disciplined and committed to making your payments on time, and you should see significant savings over time.
Learn more about the home equity programs available at First Interstate Bank, or give us a call at 855-342-3400.