Like a credit card, a home equity line of credit (HELOC) is a revolving line of credit that can cater to expenses involving home repairs or renovation.
Far from a credit card, you could lose possession of your property if you fail to pay back the loan.
HELOCs are a secured line of credit that uses your home equity as security.
If you’re contemplating using your home equity to secure a home equity line of credit, make sure to weigh the upsides and possible downsides associated with this mode of home equity financing.
Upsides
* REDUCED INTEREST RATES
When compared to credit cards, HELOCs charge a slightly lower interest rate. Currently, the standard interest rate for HELOC is less than 5 percent, while that of credit cards stands at 16 percent.
Their interest rates are variable, meaning that the rate will rise and fall with time, but even when there is a rise in rates, they can’t match credit cards.
* FREEDOM TO USE THE FUNDS
HELOC gives the borrowers the freedom to spend the funds provided on whatever they want. However, you can reap a tax benefit if you use it for a home project.
* IMPROVED CREDIT REPORT
Timely repayment of HELOC can largely contribute to strengthening your credit score and eventually lead to a better credit report.
* BORROWERS ONLY PAY FOR WHAT THEY SPEND
Similar to a credit card or a personal loan, HELOC requires one to only pay for what they have used on the home equity line, in addition to interest. Contrary to other home financing options, such as home equity loans that demand you take out the entire loan and repay it in full irrespective of whether you utilized the funds or not.
* PROVISION OF INTRO OFFERS
Some HELOCs offer intro offers that are an amazing benefit, but this shouldn’t be the only reason you choose one lender over the other since these are long-term loans. Besides the discount, your decision to take or not take should be influenced by many more other factors.
Downsides
* MINIMUM WITHDRAWAL AMOUNT
HELOCs restrict you to a minimum withdrawal of about $10,000 and more, so if you’re looking to spend anything less than the set minimum withdrawal, then this option is not for you.
* DIFFICULT TO QUALIFY CURRENTLY
Lenders have imposed stricter qualification terms for home equity loans and HELOCs due to the downturn brought about by the pandemic. To qualify for this type of financing today, you’ll need excellent credit and additional equity in your home.
* CAN IMPACT YOUR CREDIT IF YOU USE IT IRRESPONSIBLY
Similar to other loans, a delay in making HELOC payments will definitely damage your credit. In addition, keep in mind that your home acts as collateral for a HELOC, which means that if you fail to pay back the loan, the lender can take over the possession of your home.
CONCLUSION
A HELOC can help finance significant projects like a home upgrade, home repairs, and even paying school fees. However, they come with risks, and if you fail to repay, you could seriously hurt your credit and even lose your property.
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