Home Equity Line of Credit

If you own a home and need access to cash, a home equity line of credit (HELOC) is an option you may want to consider. Depending on the amount of equity in your home, you could have access to the cash you need at reasonable interest rates.

Although HELOCs have existed since the late-1970s, many homeowners remain unsure of the advantages and potential downsides of these loan
products. Learning the pros and cons of HELOCs help you make better decisions for you when considering these loans.

Advantages

• Reasonable interest rate – usually less than most credit cards or other credit lines.
• Access to cash when and where you need it – most HELOCs allow you to simply write a check or use a debit card to make purchases or generate cash.
• May (emphasize the “may”) offer you tax advantages not provided by other credit lines. Do not assume your HELOC interest is tax deductible. Check with your tax advisor first.
• You only pay interest on the amount you borrow, not the total line maximum.

Potential Disadvantages

• You’re giving the lender your home as collateral – unlike credit cards, these loans are secured by your residence.
• You need equity to qualify for HELOCs – you can’t be “underwater” or “upside down” with a mortgage higher than your home’s fair market value (FMV) – most HELOCs require you to have more than 20 percent equity in your home.
• Your income may be insufficient to qualify for two mortgage payments, your first and second mortgage (HELOC).
• Most HELOCs come with adjustable, not fixed, rates, which could increase in the future.

If used properly, typically for home improvements or for emergency cash, HELOCs are useful loan products. When used improperly, such as getting cash to visit your favorite casino, they can blow up your budget. Knowing the upside and downside of home equity lines of credit will make you a smarter consumer.