June 30, 2023
Top 10 Benefits of a HELOC or Home Equity Loan
What are the advantages of a home equity loan? How about the benefits of a HELOC? When it comes to tapping into the equity of your home, these two loan types are often top contenders and offer many overlapping advantages. Let’s explore the top benefits of home equity loans and HELOCs.
You may also like: The Differences Between a Home Equity Loan and HELOC
1. Low interest rates
Home equity loans and home equity lines of credit (HELOCs) are mortgage loans above and beyond your original home loan. Your home is secured as collateral for a home equity loan or line of credit (HELOC). Sounds like a big commitment, but it comes with a major benefit: lower rates. Compared with funding home improvements and other expenses with a personal loan or credit card, you’re likely to receive a much more attractive interest rate with a HELOC or home equity loan.
Home equity loan rates are typically fixed, while HELOCs often start with a low introductory rate and then become variable (meaning the rate fluctuates with the market). But caps are in place to limit the possibility of increases. Even with the uncertainty, a HELOC’s interest rate is often lower than other loan types.
2. No restrictions
Need to replace a roof, pay for college, or put down money on an investment property? Unlike many other loan types, there are no rules about what HELOC and home equity loan funds can be used for. It’s recommended to use your equity to add value to your home or improve your finances, but there are no limitations in place for how to use the cash.
3. Low or no closing costs
Closing costs cover the various fees and services provided throughout a loan approval process, such as credit checks, appraisals and inspections, and mortgage points. Most mortgages have closing costs between 2% to 5% of the property purchase price. While a home equity loan can fall within that range, it’s more likely to be at the lower end because the process is simpler.
And there’s even better news for a HELOC: Depending on your lender and financial situation, there may not be any closing costs at all. This is especially true if you have a strong credit history.
4. Flexibility with funds
Do you want your cash all at once or would you rather draw on it as needed? Home equity loans will provide a lump sum at loan closing, which you can use all at once or put in a special account – such as an emergency fund – for safekeeping. A HELOC provides additional flexibility to access funds when you want them over the course of several years. An extra benefit of a HELOC is you’ll only pay interest on the money you actually use.
5. Potential tax advantages
Many experts say the best use of home equity is to make improvements to your home that may increase its value. And if you use your equity funds to renovate your home, you may be able to deduct the loan’s interest at tax time. It’s recommended to speak to a tax advisor to ensure the interest is tax deductible.
6. Repayment options
Another advantage of a home equity loan is how the funds are paid back. A home equity loan can be appealing if you enjoy the predictability of a fixed monthly payment spread over a long term, such as 30 years. Depending on your lender, you may be able to pay extra or pay it off early.
With a HELOC, you may be able to adjust your payment schedules as necessary. It may even be possible to reduce your payment to interest-only for a period of time and then pay off the balance when you are more financially secure. Check with your lender to see what repayment options are available.
7. No credit card debt
If you’re trying to minimize high-interest credit card debt, a HELOC or home equity loan may be the answer. Additionally, you can use an equity loan to pay off your existing credit cards and create a streamlined, consolidated financial plan that offers relief now and gets you on a successful path for the future.
8. Keep your primary mortgage
If you’re considering a HELOC or home equity loan and feel wary of the “second mortgage” label, consider this: the cash-out refinance. This refi option allows you to access cash, like a HELOC or home equity loan, but it replaces your current mortgage with a new loan.
However, the likely trade-off here is a higher balance than you would have with a HELOC and your original mortgage. With a cash-out, you have a new interest rate and monthly payment, your term will start over, and there may be higher closing costs. If you prefer to keep your primary mortgage as-is, especially if you have a low fixed rate, a home equity loan or HELOC are most likely better options.
9. Investment opportunities
Looking for ways to add to your monthly cash flow? A home equity loan or line of credit may be an excellent option for adding investment value to your current home. This could be a renovation or addition to maximize rental potential. Alternatively, you could use the funds as a down payment on a vacation home in an up-and-coming tourist destination or a condo in the area your child will attend college.
10. Home improvements
Again: Often the best thing to do with home equity is to add value to your home. You can hire a contractor to renovate a bathroom, install new appliances, and replace windows, or do it yourself over time (and only borrow when you need it with a HELOC). Home improvements allow you to use the equity in your home to build more equity – a win-win.
Is a HELOC a good idea?
And there you have it: the many advantages of home equity loans and HELOCs. If you want to access equity without touching your current mortgage, either option could be a good idea. You may want to review their differences and top FAQs to help decide which is best for you.