Advantages and Disadvantages of a Home Equity Line of Credit

 

A home equity line of credit (HELOC) is a financial tool available to homeowners who have equity in their home. Although it is an option for most people, the advantages vary from person to person. A HELOC is similar to a home equity loan, but instead, the loan is in the form of a line of credit. A HELOC has both pros and cons. All factors should be thoroughly analyzed before you decide if it is right for you.

 

Advantages of a HELOC

 

Flexibility
A HELOC allows a person to take out money whenever they need it, which is an option that not many loan types provide. With this distinguishing feature, a person can get the money whenever they need it up to a certain limit.

 

Tax Benefit
In most cases, individuals with a HELOC debt are eligible to claim the interest rate they pay as a tax write off. However, it is wise to consult with a tax expert to make sure that you are eligible for tax benefits.

 

Lower Fees
HELOC loans come with comparatively lower closing costs and other additional fees, as compared to other loans. With some lending institutions, like First South Financial, there are not even application or appraisal fees.

 

Disadvantages of a HELOC

 

Adjustable Interest Rate
A HELOC doesn’t provide a fixed rate mortgage. There is always a chance that the interest rate could increase and in that case, you would have to make payments on the increased interest rate. Most lenders will notify you of the rate change and what your new rate and payment will be so that you can adjust your budget as needed.

 

Changing Home Values
When the Great Recession of 2008 hit, many homeowners saw their homes decrease in value to the point that they owed more than their homes were worth. One way to hedge against this is to borrow less than 100% of your home's appraised value.