A home equity credit line (HELOC) is a credit amount which the bank goes to you based on the amount of equity available on your house. Equity is the amount of money that stays when you subtract the remainder of your mortgage in the fair market value of the home. Using the home as security, the bank extends a HELOC for you to use at will.
If you bought your home for $100,000 five years ago using a mortgage of $70,000, and the home is now valued at $130,000, you’ve got $70,000 equity in your home. Banks will loan you amounts up to this equity in your home if your credit is good. Once the amount is approved, HELOC funds can easily be accessed via checks or, in some cases, a credit card associated with the credit. A HELOC is secured by using your home as collateral. Defaulting on a HELOC may lead to foreclosure of your property.
Some of the interest paid on HELOC funds is tax-deductible. Interest on amounts up to $1,000,000 is tax-deductible if used exclusively for home improvement purposes; for the other functions, the interest on loans up to $100,000 is tax-deductible. Just HELOCs and home equity loans (second mortgages) offer this tax advantage; consumer loans do not.
Getting Into More Money
In accordance with CreditCards.com, paying off high-interest credit cards would be the number-one reason people apply for a HELOC. While this makes financial sense due to the considerably lower interest rate on HELOCs, there’s a large risk that people who ran up their credit card accounts will pay off their credit card together with the HELOC, then accrue additional balances on their credit cards, end up with more debt than before they completed the HELOC.
The obligations on HELOCs with varying interest rates will be different based on a publicly available index like the prime rate. These loans may start with reduced premiums, but might rise over time, maybe worsening your financial standing. HELOCs with fixed-rate interest tend to begin with higher interest rates than variable-rate HELOCs, but the interest rate stays constant throughout the period of your loan. Some HELOCs allow for interest-only payments, enabling low payments during the loan, but require a lump payment of their principal at the conclusion of the loan.
The bank can alter the status and amount available on your line of credit at any moment. If your home cost fluctuates or your own credit rating goes down, then the lender may suspend your accounts to prevent additional use, or decrease the amount of credit offered to you. A regular home equity loan (also called a second mortgage) loans you the amount as a lump sum, eradicating any chance of the bank shifting the status of your loan.