Pros and Cons of a HELOC (Home Equity Line of Credit)

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Are you a Utah home owner in need of help covering your expenses? Is your home in need of serious repair or renovation? Is it time for an upgrade in your home? Are you starting a small business and in need of capital? Whatever the reason you might be in need of extra capital, you might find yourself in need of (or considering) a HELOC. Let’s go over what a HELOC is and how it could be helpful to you. We’ll then talk about what some of the other solutions are if you decide a HELOC isn’t right for you.

What is a Home Equity Line of Credit (HELOC)?

There are many benefits to getting a HELOC and it’s important to know what those benefits are when making such a decision. There are also some downsides as well, as making decisions with your home are rarely easy.

A home equity line of credit or HELOC is a loan in which a lender gives you a ‘loan’ for a specific amount over a specific time frame, where your home is the collateral. Consider it as something similar to using a credit card with a limit but your house is the collateral in the process. The specifics of your situation need to be discussed with your lender to make sure you don’t find yourself between a rock and a hard place in using a HELOC.

Low Cost Setup of a HELOC

For the most part there aren’t any fees in getting a HELOC setup. A HELOC is also usually issued and serviced by the bank itself. Whereas a mortgage for example many times is sold to other outside investors.

The bank sees the HELOC as an additional way for them to get you to pay interest. The bank is going to help you do what they can to get an additional “credit card” with a limit setup because it’ll be another source of payments coming from you. That being said, usually there aren’t any fees associated with the setup of the HELOC. With a standard home equity loan there are usually fees associated with the setup and maintenance. And if you want more info on accessing a HELOC, specifically, with bad credit read this article.

Interest Rates

The interest rates associated with a HELOC are usually the lowest in the industry. This is because the payments are secured by your home itself. With your home as security behind the line of credit, it’s much safer for the lender than an unsecured personal line of credit or even a regular credit card. Most HELOC interest rates are adjustable so you need to consider this before agreeing to the terms. With low interest rates it can be easy to overlook a few percentage points that may add up in the long term.

Payoff & Tax Advantages

The lender may have specific requirements but usually a HELOC can be paid off early with no penalty. Occasionally there might be a fee if a minimum balance isn’t maintained over the period. Although a HELOC can be a great source of emergency funds the bank wants to make sure that you’re actually using it. It’s in their benefit for you to take advantage of the HELOC rather than to just let it sit.

The payments can usually be very low. If you’re maintaining the interest only payments the lender will usually let the principal balance stay. Let me say that again, the lender will allow the principal balance to stay outstanding if you’re paying the interest. This means the lender will continue to collect interest payments and they know that at some point you will pay the principal balance, just not right now.

This has its benefits but it’s a very slippery slope to find yourself on. By not making any payments on the principal balance it isn’t going anywhere. At some point it’ll need to be paid and with your home as the collateral it could mean losing equity in your home or losing your home entirely to the bank.

With careful calculation and caution the HELOC payoff terms could have great benefit for you. If your home decreases in value this could have an adverse result as well. The decrease in value will immediately be translated into a loss of your equity in the home. If you were very close to using all of the equity already it would then be completely diminished.

With these low payments they could more than double depending on where you’re at in the term. Here is a very simple example using basic interest. Let’s say you have a line of credit for $100,000.00 at a 4% rate. The total term is 20 years and you only need to pay interest for the first 10. Your monthly payment on just the interest would be $333.34. When the repayment period begins, if you used all the credit, would jump to $866.67 to pay off the balance within the remaining 10 years.

As with any mortgage interest payments they are tax deductible, but always check with your tax professional. A HELOC is a type of mortgage meaning those interest payments can be deducted at the end of the year. Keep in mind the limits of mortgage interest deductions come tax time.

Solutions

You shouldn’t take any decision regarding your home lightly. There are situations that arise that none of us can see coming, it’s never easy when managing a large asset such as a home. Home equity lines of credit can be confusing but they definitely have a place in the economic development of our society. They can be a useful tool or a life saver depending on the situation.

HELOCs can also be very tragic for the few that use them incorrectly such as using their equity on consumable goods instead of secure cash paying assets.

We introduced what a HELOC is and explained how it could be beneficial to you. Keep in mind not only the upside but the downside to a HELOC as well. It may not be a one stop solution for the type of flexibility you require at this time. Rarely, is there one perfect solution to the problem you’re facing.

If you decide all together that you don’t want to or cannot go through the process of a HELOC for any reason let’s talk. You’ll find it much easier to sell your home all together “as-is” to us for a fair cash offer.

We can even arrange for you to stay in your home for months if you need to while we work things out with our popular “Sell Now, Move Later” program. On top of it all, with us you don’t have to deal with a broker, lender or bank. We make the whole process clean and simple from start to finish.

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