What are the advantages of a Home Equity Line of Credit (HELOC)?
Getting a home equity line of credit is a great way to gain access to the equity in your home. In fact, it may be the best way to use that capital, unless you know you need all the money available. Here are some of the advantages you can have with a home equity line of credit mortgage.
First advantage: get the money when you need it
With any other type of loan, you will get a lump sum. Your interest rates and payments are set. There are no options. However, with a HELOC, you are given a line of credit and a credit card or checking account that gives you access to the funds. You don’t have to use it all, if you don’t want to. This is especially good if you know you need some money, but you’re really not sure how much.
This kind of flexibility is great, because you are given a withdrawal period where you can get more money when you need it. This withdrawal period can be up to 11 years. The truth is, who knows what kind of funding it will need in the next 11 years or so? This gives you access to enough money as you need it and for projects, as they come up.
Second advantage: pay interest only on the money used
A home equity line of credit only charges you interest on the money that is withdrawn from the account. You are not charged for money that is sitting idle, as is the case with other types of loans. With those loans, you’re paying interest on the full amount, whether you’re using the money or not.
Third advantage: lower interest rate
The interest on a home equity loan is usually lower than other types of second mortgages. It’s usually only two percent above the prime rate.
Fourth Advantage – Possibly No Closing Costs
Most HELOCs have no closing costs! This certainly makes it the loan of choice, and it can save you a lot of money by not having to add these fees to your loan. Some lenders will charge you closing costs, so this should be a good incentive to find one that doesn’t. It will translate into considerable savings at closing time.
Fifth Advantage – Tax Deductible
The interest you are charged each year on a HELOC is tax deductible. Ultimately, this drives the real interest rate lower and means even more savings.
Some lenders may even use a home equity line of credit in addition to an 80% first mortgage to eliminate private mortgage insurance. The way it’s done is to get the first mortgage, pay the down payment, and then get the HELOC for the balance. Make sure you also have enough for closing costs at the time of settlement.
A home equity line of credit can come with a number of other fees and charges. Some will charge a monthly or annual fee (or both), and others may charge you if you let the money sit too long without using it. These fees can be avoided by shopping around for the best deal. A HELOC is an adjustable rate loan with few (if any) limits. Some of these will come with guarantees of convertibility to a fixed-rate loan if interest rates get too high. Also, be sure to look into any penalties you may incur if you pay off the loan early.
