For many of us, there comes a time when we could use a little extra cash. And if you’re a homeowner, you’ve got a specific option to help you get that cash when you need it: a Home Equity Line Of Credit, also called a HELOC.
A HELOC is a line of credit secured by your home. That means the equity of your home serves as collateral. In return, you receive a revolving line of credit that functions much like a credit card. As you pay off your outstanding balance, your line of credit is replenished.
Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements or medical bills.
So if you’re social distancing due to COVID-19 and ready to undertake a home improvement project, a HELOC may be a good option for you.
Keep reading to find out the answers to common questions about HELOCs.
How Does a Home Equity Line Of Credit Work?
When it comes to a HELOC, homeowners are approved for a specific amount of credit. Many lenders set the credit limit on a home equity line by taking a percentage of your home’s appraised value and subtracting from that the amount you owe on the existing mortgage.
In determining your credit limit, lenders will also look into your income, debts, credit score and other financial history.
When you take out a HELOC, the borrowing period is generally set for a fixed amount of time – also called the draw period. Draw periods typically last 5 or 10 years and you may have the option to renew at the end.
Throughout the duration of your draw period, many lenders only require a small, interest-only payment. After the draw period ends, the repayment period begins, which generally lasts 20 years. From then on, you’re paying off the principal (the loan amount) plus interest.
However, some HELOC contracts may include the option to pay extra during the draw period, which would then go against the principal amount.
Fixed Interest Rate or Variable Interest Rate?
Since a home equity line of credit uses your home as collateral, a HELOC can generally provide a more competitive interest rate than other types of credit lines.
Similar to adjustable-rate mortgages, most HELOCs operate with variable interest rates. This means the amount of interest you’re required to pay will change from month to month. That specific interest rate is calculated using two components: the index and the margin.
The interest rate index is a financial indicator that helps calculate the interest rate that lenders may charge on financial products. The margin is the number of percentage points added to the index by the lender to set your interest rate, and these terms will be set in your contract. The margin won’t change over the duration of your HELOC.
What Are the Advantages?
Besides lower interest rates, HELOCs have many advantages over other types of loans that make them a popular choice. Some of the other benefits include:
Tax Implications: The interest on your HELOC may be tax-deductible, if you use the money on home improvement projects. Additionally, the interest paid up to $100,000 in loan principal may be tax-deductible for many borrowers since a HELOC is considered a type of mortgage.
Borrowing Flexibility: With a home equity line of credit, you have the choice about how much to borrow and when. Although other types of loans may require you to borrow a lump sum, a HELOC is more flexible. And your monthly payments will reflect the amount you’re actually borrowing.
Lack of Fund Restrictions: Unlike other types of loans, you can use the money from a home equity line of credit however you see fit. There’s no need to justify your plans to the lending agency.
Repayment Options: The choice is yours about when and how you’d like to pay off your HELOC. Whether you choose to make interest-only payments during the draw period or pay more against the principal, your repayment options are flexible.
Be sure to weigh the benefits of a HELOC against the potential disadvantages to be sure you aren’t undertaking undue financial risks. Remember that failure to repay the amounts you’ve borrowed, plus interest, could mean losing your home.
Home Equity Line Of Credit with Academy Bank
Academy Bank offers home equity lines of credit so you can get the cash you need when you need it. You can access as little or as much of your credit line as you like and use the funds for whatever you need -- a kitchen remodel, debt consolidation, education expenses, a major purchase, a financial reserve for unexpected expenses, and more.
Features of Academy Bank home equity lines of credit include:
- Fixed introductory rate special for 6 months
- Borrow up to 80% of your home's value
- Low minimum monthly payments*
- Annual fee waived with auto-draft monthly payments
- Low or no closing costs*
- A lower interest rate than most credit cards
- Easy access to your funds*
Your Partner in Personal Banking
No matter your financial needs or goals, Academy Bank is here. Even during these uncertain times, we want you to know that we’re working hard to be your go-to bank.
And if you’re in the market for a home equity line of credit, we make it easy to apply online.
Whatever you need, Academy Bank is here.
Subject to credit approval.
Consult a tax advisor regarding the deductibility of interest.