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MORTGAGE KNOWLEDGE CENTER

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HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. What Are the Pros and Cons of a HELOC?

MORTGAGE

What Are the Pros and Cons of a HELOC?

What you'll learn: How a HELOC offers convenient and flexible terms that also requires discipline

EXPECTED READ TIME: 6 MINUTES

July 11, 2023

What Are the Pros and Cons of a HELOC?

A home equity line of credit (HELOC) is a line of credit based on the equity you have in your home. Like other lending options, there are advantages and disadvantages. That means it can be a great tool for the right situation – but not necessarily for every situation. Following are some HELOC pros and cons so you can determine if it’s the right option for you.

Access your home equity

You’ve built equity by making on-time mortgage payments and increasing your property’s value. Want to put those funds to work to further your financial goals?

PRO: Get the cash you need – now

Like a home equity loan or cash out refinance, a HELOC allows you to tap into your hard-earned equity for a variety of needs. Using one can shave off years of saving for home improvement costs or making a down payment on a second home.

CON: Based on property value

Borrowing against your house also comes with risk. 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 would need to make up for that lost equity at closing.

No restrictions for how to use funds

Unlike many other loan types, there are no rules about what HELOC 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.

PRO: Flexibility

Imagine you’re planning to use your HELOC to finish your basement. Just as you’re getting started with the project, your car breaks down. Fortunately, if you don’t have an emergency fund, you can draw on your credit line to cover the cost of repairs or a new vehicle plus building supplies. Or, if your project comes in under budget, you could use the extra funds to consolidate or pay off high-interest debt.

CON: Requires discipline

Let’s be real: When options are endless, it can be tempting to use your equity in ways that might not serve you in the future. Consider making a plan for the funds ahead of time. What kind of purchases are acceptable and what are not?

Home is used as collateral

Like a home equity loan, a HELOC uses your home as collateral to access your equity. That means your property serves as a guarantee to repay the loan. 

PRO: Lower interest rates

Because you’re securing the loan with your home, HELOCs typically offer lower interest rates than unsecured credit options like credit cards and student loans. Just keep in mind rates also depend on credit score and loan terms.

CON: Risk level

Putting up your home as collateral requires a solid repayment plan and some level of risk tolerance. But even the most meticulous budgeting and saving isn’t 100% bulletproof. If something happens to cause you to default on the loan, your lender can take and sell your collateral to recoup the money they’re owed. Borrow with care. 

Cash available as a line of credit

With a HELOC, you have access to a line of credit when you need it instead of a lump sum supplied all at once like a home equity loan or cash-out refinance. 

PRO: Convenience

You can access funds when you need them over a set period of time, often 10 years. Depending on your lender’s offerings, you may be able to use HELOC funds by paying with checks, a card, or account transfer. Some lenders require a minimum balance or a minimum withdrawal from your account every year of the draw period. 

CON: Requires more discipline

Again, convenience and flexibility can sometimes make it too easy to spend. Incorporate HELOC funds into your budget to avoid unintentional spending.

Flexible repayment terms

A HELOC has two periods: the draw period and the repayment period. During the draw period, you can access the cash whenever you want it, and the payments you make during this time are interest-only. When you reach the repayment period, you begin making regular monthly payments with principal and interest.

PRO: Interest-only payments

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 during the repayment period and then pay off the balance when you are more financially secure. 

CON: Can create a deeper hole

If you don't pay down the principal, you will continue paying interest without reducing your overall debt. This will take longer to pay off and makes it cost more overall. 

Variable interest rates

Interest rates can be fixed or variable. HELOCs typically start with a low introductory rate and then become variable. That means the rate can fluctuate with the market.

PRO: Reputation for favorable rates

Despite the uncertainty, a HELOC’s interest rate is often lower than other loan types. Plus, rate caps are in place to avoid significant rate increases. 

CON: Harder to budget

Interest rates increasing or decreasing with market forces makes it hard to know your payments up front. This can make it harder to budget for monthly expenses. 

Possible tax advantages

Just like your primary mortgage interest, you may be able to deduct your HELOC interest if you itemize on your annual tax return. 

PRO: Potential savings

Typically, a HELOC interest is tax deductible if the funds are used for home improvements or to buy a property. Be sure to talk to a tax advisor and document your purchases before pursuing this option. 

CON: Not a given

The Tax Cuts and Jobs Act of 2017 changed the home interest deduction, including the tax deductions offered by home equity lines of credit. However, your HELOC may still offer tax advantages depending on how you use it. 

Home equity line of credit – pros and cons

Here’s a quick recap of some of the advantages and disadvantages of a HELOC.

Advantages

Disadvantages

Take only as much money as you need, as you need it, during the draw period

Variable interest rate may increase with the market

Pay interest only on the amount you draw

Fluctuating monthly payments can make it hard to budget

Low introductory interest rate

Revolving line of credit can be tempting to use for unintended purposes

Acts like a credit card but often with a higher balance and lower interest rate

Risk of foreclosure because home is used as collateral

Final thoughts

There are pros and cons of using home equity in all forms, including HELOCs, home equity loans, and refinances. Of all the options, HELOCs are favored for their convenience and flexibility. You access the funds only as you need them and pay only for what you borrowed – a great solution if you have one or more ongoing projects and don’t know the total costs up front. If you still aren’t sure which way to turn, talk through your options with a trusted loan officer.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

How Much Equity Do I Need for a HELOC? | PenFed Credit Union

Find out HELOC requirements, how long it takes to get a HELOC, and how much equity you need for a HELOC here.

couple discussing home renovations and paint colors

Personal Loan vs. HELOC: Which Is Right For You? | PenFed Credit Union

When comparing a personal loan vs. a HELOC, the choice depends on your situation. We'll explain the pros and cons of personal loans and HELOCs and which is right for you.

man working on home improvements

HELOCs & Home Equity Loans – Top FAQs | PenFed Credit Union

Using the equity in your home and getting a HELOC, or home equity loan is a big decision. Discover the pros and cons and get your top questions answered.

College student working

What Is a Home Equity Loan? | PenFed Credit Union

Find out what a home equity loan is, including the pros and cons. We'll talk about tax-deductibility and how to calculate equity. Then you can decide if one is right for you.

loan officer discussing home equity
image

HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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