If you are hoping to take advantage of your home equity, a Home Equity Line of Credit (HELOC) can go a long way. HELOCs are flexible, allowing you to borrow as needed, up to your credit limit. It is similar to having a credit card but secured by the equity in your home.
With the best HELOC lenders, you can usually find a competitive rate and borrow more than you could with an unsecured personal loan or credit card. Your line of credit is based, in part, on your home's available equity, so if you have a lot of equity, a HELOC might be a good option. Truthinequity review multiple lenders and consider low rates and fees, payment terms, and more to find the best HELOCs available for your projects.
What is a HELOC?
A HELOC is not an installment loan, like a home equity loan. Instead, it is a home equity line of credit based on the amount of equity you have in your home. Your HELOC works much like a credit card, and you “free up” more space as you make payments. A HELOC is a revolving line of credit with a withdrawal period, which allows you to make money as needed over a set period of time. However, after the withdrawal period is over, you start making regular payments.
How does a HELOC work?
You can use a HELOC for home improvement and repair projects, debt consolidation, or other major life expenses.
With a HELOC, you can borrow up to a percentage of your home's value, depending on the amount you owe. For example, if you have a home worth $ 250,000 and you still owe $ 125,000 on your original mortgage, you have $ 125,000, or 50%, in your available home equity. However, a HELOC lender bases your credit amount on your combined loan-to-value (CLTV) ratio. For example, a lender may limit you to 85% CLTV, which includes your HELOC plus your original mortgage. If your home is worth $ 250,000, 85% equals $ 212,500. So if you have a 50% equity in your home at $ 125,000, you can only borrow a HELOC up to $ 87,500, the difference between the total CLTV and the amount of your equity.
The HELOC withdrawal phase, during which you can withdraw money as needed, down to your available line, is typically 10 years. You can make payments during the withdrawal phase, and many HELOC lenders allow you to choose whether to make interest payments or payments that also include principal.
Most HELOCs come with variable interest rates, although some lenders may offer the option of converting your variable rate to a fixed rate, potentially for a fee.
Once the withdrawal phase is over, you have the refund phase. This is when you can no longer withdraw money and must make regular payments until the credit line is canceled. Repayment periods vary by lender, although it is common to have a repayment term of up to 20 years. Be aware that if you cancel the credit line early, you may incur a penalty.
Is HELOC tax-deductible on interest?
Depending on how you use your HELOC, you may be able to deduct some of the interest from your taxes. However, to qualify for a tax deduction, the funds must be used for home improvement. You cannot claim a tax deduction for HELOC funds used for other purposes, such as debt consolidation or special events.
How to get a HELOC
Before you get a HELOC, you should make sure you have available equity in your home. The lender usually checks the difference between the value of your home and what you still owe. When you're ready to get a HELOC, fill out the application with the lender online or in person at a branch. If the lender sees that you have the ability to repay the line of credit and adequate home equity, you may be approved for the HELOC and you will receive the line of credit in a few days.
It's possible to get a HELOC through your current mortgage lender, but it may also be smart to search other lenders online to find the best HELOC rates and terms.
HELOC vs. Home Equity Loan
A HELOC is a revolving line of credit that can be accessed as much as needed during the retirement period without reapplying. You have a credit limit that is determined by your home equity and the amount of available credit you have used. A home equity loan, on the other hand, is an installment loan with a fixed amount borrowed and a fixed payment schedule.