Before the Great Recession, homeowners weren’t shy about opening and utilizing home equity loans and lines of credit. After all, home values were through the roof, and many saw the benefits of tapping into their equity to consolidate debt and pay for big purchases, like cars and college educations.
However, many forgot the downside of home equity lines of credit; a failure to pay could result in losing your home through foreclosure.
The market has since rebounded, but Americans are still timid when it comes to home equity products. Should you consider one?
First, what is a HELOC?
A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses, or to consolidate higher-interest rate debt on other loans. HELOCs generally have variable interest rates, but some lenders offer a fixed-rate option. You can borrow against this line of credit whenever you’d like during the draw period (typically 10 years), up to the limit you established at closing of the HELOC. Once the draw period concludes, you enter the repayment period (typically 20 years) and must pay back principal and interest in full.
What are the benefits?
HELOCs generally offer low introductory rates, which can be locked. Thus, if you’re seeking to consolidate some high-interest debt or need funds for a big purchase, a HELOC can be an affordable credit product.
HELOCs can offer tax benefits and breaks. Some of the tax breaks have been eliminated or weakened over the years, but you can still deduct the interest you pay on a HELOC. The catch is that you must itemize your deductions to take advantage of this tax break.*
HELOCs can be helpful tools to help you leverage your cash flow. Unlike credit cards or personal loans, HELOCs generally have lower interest rates. Thus, if you are smart with moving your money around and pay your bills on time, a HELOC could be a nice product within your overall account and loan mix.
If managed correctly, a home equity line of credit can be a smart product to have in your suite of financial products.
Learn more about UNIFY’s HELOC options.
*Consult your tax advisor.
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