Homeowners can use their home’s equity to provide money for significant expenses. Basically, this means homeowners borrow money from themselves by using the equity in their home as collateral. You can borrow against equity via a home equity loan or a home equity line of credit (HELOC).
For a home equity loan, a homeowner takes out a loan for a specific amount of money, such as $10,000, based on the equity accrued in their home. A HELOC is different than a home equity loan because it allows the homeowner to borrow smaller sums instead of a large lump sum. With a HELOC, they can borrow smaller amounts necessary for specific expenses. For example, instead of taking out a $10,000 home equity loan, a consumer can use a line of credit associated with a HELOC and borrow a smaller amount, such as $5,000.
Both methods borrow against equity, but a HELOC can offer several benefits over a traditional home equity loan.
1. Lower Interest Rates
HELOCs often offer adjustable-rate loans, so the rates can be lower than a standard home equity loan’s rates. HELOCs also offer better interest rates than credit cards or personal loans. Additionally, consumers usually don’t pay application fees or closing costs when getting a HELOC, unlike many home equity loans, which can make an equity line of credit a more affordable loan option.
2. Reduced Fees and Interest Charges
HELOCs accrue interest only on the amount borrowed, which means that when you receive a home equity line of credit, you don’t pay any interest unless you use funds from the credit line. Applying for a HELOC and getting approval doesn’t cost anything since you don’t repay principal or interest until you use the funds. A home equity loan often requires application fees, and shortly after the loan is approved, you receive the money and must start to pay it back.
3. Freedom in Usage of Funds
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HELOCs usually have few restrictions on fund usage. You might need the money for home improvements or repairs, or you can use it for funding college, consolidating debt, or taking that dream vacation.
4. Tax Advantages
Suppose you use the money to conduct significant home repairs or upgrade your house, such as putting on an addition. In that case, the interest payments are tax deductible according to IRS regulations. HELOC money used for other purposes isn’t tax deductible, so check with an accountant to ensure your desired use is covered and meets all federal guidelines to be tax deductible.
5. Flexible Repayment Options
HELOCs require monthly interest payments, but you can take as long as you want to pay back the principal on a home equity line of credit. You can also usually pay the loan back early without penalty.
A HELOC can provide homeowners many benefits that other loans don’t offer. You might consider using a home equity line of credit for debt consolidation, paying college tuition, or funding a major home improvement project. To qualify for a HELOC, you must have a minimum amount of equity in your home. You’ll also likely need a good credit score and verifiable means of income to repay the loan.
