If you’re a homeowner, you may be eligible for a home equity loan, or HEL. An HEL is a special loan that allows you to borrow 80% of the value of your home, minus your current mortgage balance. In addition to these loans, banks may also offer home equity lines of credit, or HELOCs. Instead of the lump sum an HEL provides, a HELOC creates a set line of credit that homeowners may use over time. Each month, the borrower may pay the monthly minimum or more, as desired. These lines typically have interest rates that change on a monthly or yearly basis, while HELs typically have fixed interest rates.
While having an additional option for your finances is important, there are also risks that come with HELs and HELOCs. If you fail to make your HEL payments on time, you could risk losing your home while still having to pay the remaining balance. Similarly, failure to stay current on HELOC payments can result in home repossession. Unlike HELs, however, your credit limit through a HELOC can be dropped to whatever you currently owe, preventing you from using any more credit. To stay informed when debating a HEL or HELOC, consider the following:
- Be Aware of Variable Rates: A low initial interest rate can be tempting at first, but variable rates are notorious for skyrocketing after the first year. Ask your lender about the worst-case scenario of interest rate changes, especially before pulling the trigger on a HELOC.
- Understand Tax Breaks: HELs and HELOCs are enticing because the interest you pay may be tax deductible. In fact, if you’re using the money for home improvements, the interest is tax deductible up to $750,000.
- Watch Out for Fees: Many lenders charge large initial or ongoing fees when you wish to borrow against your home equity. In some instances, however, these fees can be waived. Always understand the full scope of these fees before deciding if a HEL or HELOC makes sense for you.
- Shop Around: Before deciding on a home equity lender, it’s important to know all your options so you can make the best decision for your situation. Contact me if you have any questions, and I am more than happy to help you find the best fit for your needs.