Selling your home profitably could be a considerable boon. Besides that, getting a Home Equity Line of Credit is a major financial decision. You need to decide while you are looking for a loan in the first place; a HELOC provides you with some best options. 

HELOC is just like a credit card that is used to pay for your home renovations, higher studies, or other significant expenses. Since many people know about the use of credit cards to pay these expenses, they can quickly get an idea about how HELOC works.

Therefore, if you own a home and are thinking about tapping your house into home equity, it’s a fantastic decision to make for your financial life. With HELOC, you will get multiple advantages and disadvantages, including monthly payments, credit scores, etc.

Notwithstanding, many people confuse HELOC with a home equity loan, so know some basics about HELOC.

What is HELOC?

Unlike a home equity loan, the Home Equity Line of Credit offers you a line of credit that can be borrowed whenever required. It works like credit cards that come with variable interest rates. However, your monthly payments depend upon how much you borrowed and the interest rate on it. 

HELOC conventionally works on a 30-year plan, in which you have a 10-year draw period to spend with your HELOC and the remaining 20 years to pay off the continuing expenses. Additionally, you are usually provided with the maximum amount that can be lent on the basis of equity in your home. 

Anyhow, obtaining HELOC provides you plenty of benefits and a few shortcomings as well.

Pros of a Home Equity Line of Credit

A HELOC typically allows you to borrow up to 855 of your home’s worth, excluding mortgage payments. It means that HELOC does not work for the users who do not have substantial equity in their homes. Besides, you require a good credit score to qualify for HELOC and a proper way of income to pay off your loan. 

Yet, if you decide to acquire a HELOC, you will get the following advantages of a home equity loan.

✔️ Low-Interest Rates

HELOC offers lower interest rates than credit cards. An average interest rate over HELOC is not more than 5% which is thrice less than the credit card interest rates. Lower interest rates also provide you with adjustable-rate loans. Nonetheless, these rates may vary with time as they go higher.

✔️ Flexible Repayment Options

You get flexible options regarding paying off your mortgage. The target time for the HELOC may also vary and depend upon how much you want to borrow. While keeping in mind this factor, the HELOC gives you a time of up to 30 years. Within this period, you have to make interest payments in the first 10-years and enter a repayment period in the remaining years.

✔️ Improved Credit Score

One of the most significant components of a credit card is the credit score which should be specific to be eligible for acquiring a mortgage. Getting a HELOC in your credit portfolio automatically boosts your credit score because it depicts a sign of healthy financial history.

✔️ Higher Credit Limit

Since you opt for the HELOC to secure your home, your credit limit will be much higher than a standard credit card. However, the particular limit depends upon how much equity you have on your home, your credit history, and other elements.

✔️ No Withdrawal Fee

Usually, credit cards charge a fee for withdrawing cash in advance and on check-writings. Yet, with HELOC, you don’t need to pay a fee for withdrawing money. However, if your lender wants to charge a fee, it would be better to seek another lender.

✔️ Utilize Money Anywhere

With a personal loan or credit card loan, you can use your money wherever you want; HELOC works the same way. But, most people get HELOC for more considerable expenses such as home repairs, etc., to get tax advantages. Moreover, you can deduct the paid interest rate on your home equity if you have used it for building or renovating your home. 

✔️ Eligible for Low APR

The interest rates are lower in HELOC for several years and enable you to take advantage of it. Since HELOCs have lower interest rates and initial costs, that’s why it is considered ideal for debt consolidation. An average APR rate with the credit card is 16%; however, the HELOC offers it below 5%.

Cons of a Home Equity Line of Credit

Tapping into your house is a good option, but you may find some downsides to getting HELOC. So you must be aware of these weaknesses before getting into home equity.

Fluctuating Interest Rates

If a home equity loan offers a lower interest rate, it may vary with time. It means that the interest rate can go up or down as per the Federal Reserve’s decisions. So no matter if you take HELOC, it is not essential to get lower interest rates every time.

Hard Criteria

The lender with HELOC may be stricter with their eligibility criteria because of the collapse due to the COVID-19 epidemic. You would require a good credit score and more equity on your home to qualify the home equity line of credit. 

Hidden Fees

Well, there is no fee for HELOC, but some lenders may cost you an annual fee on it. It usually happens when you refinance or cancel a HELOC before withdrawing, the period ends, and they lose money. Hence, they charge an early termination fee in order to fulfill their loss. when 

Another reason could be the additional fee for not maintaining a minimum loan balance to borrow a particular amount every year. Thus, you must be watchful for hidden charges before taking out the loan.

Dropping Home’s Worth

Getting a HELOC may decrease the value of your home. As it eats away the remaining equity on your home, it becomes problematic if you continue selling or refinancing your home through HELOC. 

Substitutes of Home Equity Line of Credit

HELOC is tremendously beneficial for paying off your mortgage earlier with lower interest rates. However, everyone may not qualify the requirements for home equity. Therefore, below are some other options that are considered the best replacements for HELOC.

Home Equity Loan

This is one of the renowned debt options, which many people may mix up with the HELOC because both debt types are considered the second loan. Yet, a HELOC is more convenient and effortless, which allows the debtor to use his home’s equity in the precise amount he requires. Nonetheless, a home equity loan gives you a total amount of withdrawal.

✦ Cash-Out Refinance

Another option is the cash-out refinance that works by cutting your current loan into a new loan at a higher rate. Although it depends upon the amount you owe, it enables you to pay off your present debt and get the difference between the two loans in one amount. This option is helpful because you only have one loan rather than two, and you get your refunds at the same time instead of getting access to the credit line.

Conclusion

A home equity line of credit could be a captivating and beneficial way for those who can get adequate equity on their homes. It provides more flexible options that improve your financial history by enhancing your credit score and offering lower interest rates. Notwithstanding, you must be aware of its shortcomings before acquiring this option. In case of any ambiguity, feel free to contact our experts and get the most appropriate answers.