What Are the Pros and Cons of a HELOC?
What you'll learn: The pros and cons to be aware of when using a HELOC
EXPECTED READ TIME: 3 MINUTES
December 1, 2020
What is a HELOC?
A HELOC — Home Equity Line of Credit — is revolving credit based upon the equity you have in your home. You can access the funds available to you through a credit card, checking account, or you transfer the funds to another account.
Like other types of loans or even credit, it is a decision you should research before jumping into. If you are looking for cash, there are some other options available — like a home equity loan or a cash-out refinance. We will go through some of the pros and cons of a HELOC so you can determine if a HELOC is right for you.
What are the pros of a HELOC?
- Lower Interest Rates. Typically, HELOCs offer lower interest rates than an unsecured credit option like a credit card. Because you are securing the line of credit with the equity in your home, you are able to take advantage of better interest rates.
- No Fees to Access Your Cash. With a HELOC, you have access to a line of credit when you need it, not a lump sum supplied to you all at once like a home equity loan. Therefore, you can take out a HELOC as a safety net and only access the cash when you need it — and when you do, there won't be a fee to withdraw the money. Keep in mind that some lenders require a minimum balance or a minimum withdrawal from your account per year.
- Possible Tax Advantages. Just like your mortgage interest, because this is a type of mortgage, you may be able to deduct your HELOC interest if you itemize. Typically, you'll need to show that you used the HELOC for home improvement, or to buy a property. It’s always advisable to contact your tax advisor before assuming any tax benefits. Your situation or the situation in your area/state may affect any tax scenarios.
- Flexibility with Your Money. You don’t need to provide any specific plans for your money to obtain a HELOC. You can use the money as you wish and when you need it.
- Borrow Only What You Need.
- Flexible Repayment Options.
What are the cons of a HELOC?
- Reducing Debt. Since you may be able to make monthly payments on just the interest — if you don't pay down the principal, you will continue paying interest without reducing your overall debt.
- Variable Rates. HELOCs have a variable rate, meaning the interest rate can change with the market so there is a chance your interest rate can increase with market forces.
- Decrease in Property Value. It's possible your home can lose value over time and you have leveraged equity that may no longer exist. When it comes time to sell your home, you'll need to make up for that lost equity at closing. Most HELOCs have a clause that states a decline in property value can result in a freeze — or termination — of your HELOC.
- Your Home is Collateral. You're using your home as collateral, which reduces your equity for when it comes time to sell.
- Can Be Risky. A HELOC can be risky for undisciplined borrowers. If you're using your HELOC to consolidate higher interest loans like a credit card, be careful of racking up credit card debt again.
It is always a good idea to do your homework ahead of time. Determine what your needs and options are. Research the ways you can use the equity in your home to get a better understanding of the efficient use of a HELOC or a home equity loan.
To learn more about HELOCs or home equity loans, contact PenFed:
- Call 866-386-7254
- Visit the Mortgage Center