Your Guide to a HELOC (Home Equity Line of Credit)

What is a HELOC?

A home equity line of credit (HELOC) is a type of loan that allows you to borrow money using the equity in your home as collateral.

HELOCs are often structured as revolving credit, meaning you can borrow, repay, and reborrow up to your credit limit as needed. For example, if you have a HELOC with a credit limit of $100,000 and borrow $30,000, you will have $70,000 remaining in available credit.

If you pay $10,000, you will have $80,000 remaining in available credit. This flexibility can be useful if you have unexpected expenses or if your financial needs change over time.

To qualify for a HELOC, you typically need to have equity in your home, a good credit score, and a stable income. You may also need to meet other requirements, such as having a low debt-to-income ratio and sufficient income to cover the loan payments.

The amount you can borrow with a HELOC is typically based on your home's equity and creditworthiness. Most lenders will allow you to borrow up to a certain percentage of the value of your home, minus any outstanding mortgage balances.

The interest paid on a HELOC may be tax-deductible if the funds are used for qualified home improvement expenses or to buy, build, or substantially improve the home that secures the loan. The funds must be used to improve the borrower's main or second home to qualify for the deduction.

The main home is where the borrower lives most of the time, while a second home is a vacation home or rental property. The deduction is unavailable for a HELOC if used to pay off credit card debt or other personal expenses.

In this article, we will discuss how a HELOC can offer you the flexibility to meet the changing needs of your financial goals.

Benefits of a HELOC

There are several potential benefits to using a HELOC. These include:

Access to Funds

A HELOC can provide a convenient source of funds for home improvements, debt consolidation, other large expenses, or other financial needs.

Flexibility

With a HELOC, you can borrow as much or as little as you need, up to your credit limit, and make payments on the amount you borrow. This can be useful if you have unexpected expenses or if your financial needs change over time.

Potential Tax Benefits

Interest paid on a HELOC may be tax-deductible, depending on the specifics of your loan and your individual tax situation. Consult your tax advisor for your specific situation.

Potential to Save Money

If you have high-interest debt, such as credit card debt, a HELOC may allow you to pay it off at a lower interest rate. This can help you save money in the long run.

The interest rate on a HELOC may be lower than that on a credit card. This is because a HELOC is secured by the equity in your home, providing the collateral for the loan. In contrast, credit card debt is typically unsecured, which means there is no collateral to back it up. As a result, credit card companies may charge higher interest rates to compensate for the higher level of risk they are taking.

HELOC or Home Equity Loan - What's the Difference?

A home equity line of credit (HELOC) and a home equity loan are both types of loans that allow you to borrow money using the equity in your home as collateral. However, there are some key differences between the two:

Repayment Terms

A HELOC is typically structured as a line of credit that you can draw on as needed during a set period of time, called the draw period. During the draw period, you can borrow as much or as little as you need, up to your credit limit, and make payments on the amount you borrow.

In contrast, a home equity loan is a one-time lump sum loan repaid in fixed monthly installments over a set period.

Fees

HELOCs and home equity loans may have fees, such as closing costs, origination fees, and annual fees. It's important to carefully consider the fees associated with each type of loan before making a decision.

In general, a HELOC can be a more flexible option than a home equity loan, as it allows you to borrow as much or as little as you need, up to your credit limit, and make payments on the amount you borrow. However, it's important to carefully consider the terms and conditions of both types of loans before deciding. Our advisors at Wellby Financial would be happy to review your options and help you find the best choice for your unique financial journey.

Achieving Your Financial Goals with a HELOC

A HELOC can potentially help you achieve your financial goals in several ways:

Pay Off High-interest Debt

If you have high-interest debt, such as credit card debt, a HELOC may allow you to pay it off at a lower interest rate. This can help you save money in the long run and get out of debt faster.

Finance Home Improvements

A HELOC can be a convenient source of funds for home improvements, such as updating your kitchen or bathroom, adding a room, or making energy-efficient upgrades. These improvements can increase the value of your home and potentially help you achieve your financial goals.

Cover Unexpected Expenses

A HELOC can provide a source of funds for unexpected expenses, such as medical bills, car repairs, or home repairs. This can help you avoid using high-interest credit cards, taking out an unsecured personal loan, or draining your savings to cover the expenses.

With the flexibility that comes with a HELOC, you'll be able to cover these financial needs and get back peace of mind knowing your available funds can adapt to your financial needs. Let your home's equity work for you by offering you the revolving credit line that gives you the freedom to spend what you need when you need it.