Advanatges and disadvantages of a Home Equity Line of credit
A home equity line of credit, often referred to as a HELOC, is a
loan that is secured by using an existing residence as collateral.
Unlike comparable forms of credit, the proceeds from a home equity line
of credit can be used for a variety of purposes. While there are
certainly a variety of benefits associated with this form of credit,
including rapid access to funds at a relatively low interest rate, the
inherent risk associated with using a personal residence as collateral
is high.
Factors to consider
Processing Speed and Customization.
A home equity loan provides homeowners with lump sum of cash, often more
than they require. However, a HELOC provides homeowners with a line of
credit, which is closest in functionality to a credit card. The obvious
benefit of this is that homeowners are only responsible for the interest
on the portion of the total credit line that they utilize. This allows
customers who are borrowing money for a specific project or single event
to manage costs in response to variance in the project itself. |
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Tax Implications
A home equity loan provides borrowers with tax deductions equal to the
interest on the first $50,000 on a return, with an increase to $100,000
for married couples filing jointly, as a straight itemized deduction.
However, is borrowers use their home equity line of credit strictly for
home improvements, then options expand to $500,000, and $1,000,000
respectably. For more information on this, check our Tax Deductibiity of Helocs page. Loan Terms.Based on the secured nature of a HELOC, standard interests rates tend to be closer to what consumers would expect when searching for a mortgage as opposed to a traditional, unsecured line of credit. Additionally, borrowers are often able to access a much larger total line of credit by utilizing a HELOC then their personal financial history would otherwise allow.
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Purchase Rates
Refinance Rates,
Refinance Rates
Purchase Rates
Purchase Rates,
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However, as with any line of credit, overall interests are subject to fluctuation based on current market conditions, which could lead to relatively significant variance between credit lines in otherwise similar conditions. Total credit limit is also limited to the total amount of equity currently available in the home. Home as Collateral.The biggest down side of securing a home equity line of credit is clearly the usage of a primary residence as collateral for the credit line. Unlike other forms of credit, failure by borrowers to meet their debt obligation in this instance can lead to the seizure of their home by the lending institution. Unfortunately, based on the relatively chaotic nature of the housing industry, fluctuations in home value can often leave borrowers in the unfortunate situation of owing more on their mortgage and HELOC than their home is worth.
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Interest Rates
Interest Rates on Helocs are typically higher than standard loans, so there is a potential to pay more interest with a line of credit than a traditional Equity Loan or a cash out refinance. This is almost always offest by the fact that interest is only charged on the amount used, but borrowers should be aware that if a line of credit is used to maximum capacity they will incurr higher interest charges than other types of property-secured loans. If you are looking to raise a large amount of money, and have sufficient equity you may want to consider cash out refinancing as an option.
Impulse Buying
The great flexibility provided by a home equity line of credit can also lead to overuse of the facility if you're not careful. Just as many people struggle to avoid over using credit cards, a line of credit suffers the same "weakness". The ability to draw upon it at will can lead to using it for things you otherwise wouldn't - if you're prone to impulse buying you may want to keep the limit of your heloc down.
