A HELOC is a revolving line of credit that is guaranteed by the equity in the home. You’re borrowing against the available equity in your home and the house is used as collateral for the line of credit. The HELOC account is structured like a credit card account in that you can only borrow up to a predetermined amount and make monthly payments on the account, depending on how much you currently owe on the loan. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. You can choose to use some or all of your credit line, and you are charged interest based on only the amount that you’ve actually borrowed. So, if you haven’t used any of your line of credit, you won’t owe any principal or interest.

Pros:

1. Lower rates and APRs than credit cards. – CC National Average was at 20.92% February 2023.
2. Tax-deductible interest. – Interest paid on a HELOC is tax deductible as long as it’s used to “buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS.
3. Flexible withdrawals and repayments – 3yr-10yr draw periods.
4. Potential boost to credit history – This is just like a credit card and will positively impact your score with on time payments.
5. They are a good idea when used to fund improvements that will increase the value of your home.
6. In a true financial emergency, a HELOC can be a source of lower-interest cash compared to other sources, such as credit cards and personal loans.
7.  HELOCs allow you to borrow lesser amounts over time, so that you’re only taking the funds you need when you need them.
8. HELOCs are often used as a solution when the borrower is unable to qualify for a Second Mortgage.
9. You can use a home equity line of credit (HELOC) or a home equity loan to purchase a second home.

Cons:

1. Your home becomes collateral for the loan.
2. The amount of equity you’ve incurred will be reduced with the addition of another loan.
3. You’ll be adding another debt.
4.  If using an ARM product, your interest rate could rise – there are fixed-rate options available.
5. There is potential to run up a balance quickly, as with any tradeline.
6.  If you fail to make on-time payments or if you miss payments altogether, a HELOC will negatively impact your credit score, as with any tradeline.
7. Some lenders may require a prepayment penalty if paid off early. Many HELOC’s available today have prepayment penalties. However, most penalties apply only if the home equity line is both paid off and the account is closed to further cash draws or advances. Therefore, if the home equity line is paid down to a zero balance but is left open to future draws against the account, the penalty would not apply. In those instances where a home equity line borrower chooses to both pay off and close the account, the prepayment penalty normally imposed amounts to about $500 (this fee varies lender to lender).

Why would a HELOC be a better option?

• You want more flexibility.
• You want a better interest rate than a personal loan or credit card can offer.
• You already have a good mortgage rate and want to keep it.
• You plan to use your HELOC only for tax-deductible home improvement projects.