Q: I’m looking to tap into my home’s equity, possibly using a Home Equity Line of Credit. What are some of the advantages of choosing the HELOC option?
A: A Home Equity Line of Credit (HELOC) is an open credit line that is secured by the paid value of the borrower’s home. A HELOC provides homeowners with a convenient way to use the equity in their home.
HELOCs have a “draw” period, during which time the borrower can access the available funds. That time frame generally ranges from 5-10 years. When the draw period ends, the loan will have to be repaid, either immediately or within the next 15-20 years.
Once approved for a HELOC, borrowers can spend the funds however they choose. Some plans may require the homeowner to borrow a minimum amount at each draw, keep a predetermined amount outstanding or withdraw an initial advance when the line of credit is first established.
HELOCs are often used to fund a home renovation or expansion, but they can also be used to cover any large expense, such as a medical emergency, a new business venture, a wedding, a dream vacation, an adoption or the purchase of a recreational vehicle.
Here are some of the primary advantages of a HELOC:
Only borrow what’s needed
A HELOC does not provide borrowers with a lump sum of cash. Instead, like a credit card that is only used when necessary, the homeowner can withdraw funds from the HELOC as appropriate. This makes a HELOC a great option to pay for expenses when there is not a known price tag. Also, because the borrower is only paying interest on the money they actually withdraw, they’ll have the freedom to take out a larger line of credit and decide how much of it to use later on.
Qualify for a low Annual Percentage Rate (APR)
Interest rates continue to hover at all-time lows. Opening a HELOC now means qualifying for low interest rates on the line of credit. Most HELOCs have fluctuating interest rates, but some lenders allow for the possibility of converting large withdrawals into fixed-rate loans.
Terms and repayment plans for HELOCs are generally flexible. During the draw period, homeowners can withdraw funds from the HELOC as needed and use the money however they please. When the draw period ends, the homeowner may be allowed to renew the line of credit and continue withdrawing funds as needed.
Monthly payments also vary
Many lenders only require borrowers to make payments toward the interest of their loan during the draw period. Once that time is over, though, the borrower will need to pay back the entire principal of the loan immediately in one “balloon payment,” or over the course of 15-20 years. This is especially beneficial if the borrower does not have the funds to pay back the loan now, but anticipates an improvement in their financial situation within the next few years.
The timeline for a HELOC can vary depending on the lender and on how much the homeowner wants to borrow, but HELOC terms can last up to 30 years.
Potential tax benefits
As per the Tax Cuts and Jobs Act of 2017, the interest paid on home equity loans and lines of credit is tax-deductible if the funds are used to buy, build or substantially improve the home of the taxpayer who is securing the loan.
Build a credit score
There’s no need for an excellent credit score to qualify for a HELOC, and on-time monthly payments can significantly boost a homeowner’s score.
When life throws an unexpected curve ball or even a unique opportunity, a home equity line of credit can be a great option. With interest rates at record laws, taking out a HELOC makes more sense than ever.
Interested in applying for a HELOC? Right now, we are offering introductory rates as low as 2.74% APR* and NO closing costs! Check our HELOC rates and apply today!
*The Annual Percentage Rate (APR) of a HELOC is indexed to the Prime Rate as published on the money rate table in the Wall Street Journal + a margin for the life of the loan. Prime Rate as of 3/16/2020 is 3.25%. Our current lowest APR as of 3/16/2020 for credit lines over $100,000 is 3.25%, which includes + 0.00 margin and for credit lines under $100,000 is 3.75%, which includes + 0.50 margin. HELOC APRs are variable and subject to change. For credit lines of $100,000 or less, an introductory rate as low as 2.74% fixed APR applies for the first twenty-four (24) months of the loan. After the introductory period, the APR will revert back to the original rate indexed to the Prime Rate. Your actual rates may vary, depending on credit history, loan amount and term, loan to value ratio, and other factors. The maximum APR that may be imposed is 18%. Maximum loan-to-value as high as 90%, depending on creditworthiness. No closing costs for loan amounts of $100,000 and less except for legal fees, if required. A review of the credit eligibility, adequate property value , and a clear title is also needed for qualification. Other restrictions may apply. The minimum loan amount is $10,000 and the maximum loan amount is $300,000. The term is up to 240 months. Pay interest only on the amount drawn or 1% of the balance. Membership with Freedom First is a requirement for this offer with a $5 share account. Property insurance, if applicable, must be in effect on the property being secured and the said property must be in the Freedom First Credit Union membership area. The property must be owner occupied . Please consult a tax adviser for further information regarding the deductibility of interest. All credit union loan programs, rates, term and conditions are subject to change at any time without notice. Contact a Freedom First Credit Union representative at (540) 389-0244 for complete details.