Why You Should Open a Home Equity Line of Credit

As a homeowner, you’ve put a lot of time and money into your home. The more you’ve put into your home and the more of your mortgage that you’ve paid off, the more equity you’ve built into your home. Once you have enough equity built up, there are a couple of different ways you can use it. One option is to take out a home equity loan. The other is to open a home equity line of credit, or a HELOC. As it turns out, there are some pretty good reasons to open a HELOC if you’re able to.

Interest Rates Are Low

Virtually every type of loan and line of credit has an accompanying interest rate. Interest rates are what make it beneficial for the creditor to offer a loan. Obviously, the lower the interest rate, the better off you are, though the creditors make less money from loaning you the cash you want. Typically, home equity lines of credit have variable interest rates instead of a fixed interest rate. Depending on who the line of credit is through, however, you may be able to opt for a fixed interest rate instead. Last year, the national average interest rate for a HELOC ranged from 4.28% to 6.95%. Compared to the interest rates you would see on a credit card even with an excellent credit score, the interest rate for a HELOC is much more favorable to borrowers.

Put Your Debt in One Location

If you look at a breakdown of common debts held by Americans, the most common debt is a mortgage, followed by student loans, auto loans, personal loans, and credit card debt. That can be a lot of different debts to keep track of. To add to the potential confusion, each debt is going to have its own payment due dates and interest rates that you’ll need to be aware of. Failing to make payments on time seriously impacts your credit score and ability to obtain financial assistance in the future, among other things. 

Consolidating debt can make it easier to manage your debt by eliminating multiple debts so you can focus on just one or two. Depending on the details surrounding the debts you carry, choosing to consolidate your debt into a HELOC may be a viable option for you. Be aware that this means that your home is now the collateral for the debt. If you fail to make payments, you could end up losing your home. Unless you are very disciplined about making payments, this may not be the best choice for debt consolidation.

Tax Benefits

Depending on what you choose to do with the money in a HELOC, you may be able to use it to your benefit when it’s time to file your taxes. Finding ways to reduce your tax liability means that you owe the government less. The 2017 tax reform included a stipulation that allows homeowners to deduct the interest on qualified loans up to $750,000 for joint filers and $375,000 for single filers for homes purchased or loans issued after 2017. Whether or not a HELOC is considered a qualified loan depends on what the funds are used for. In order to qualify for this tax deduction, you’ll need to use it for substantial home improvements. More specifically, the home improvement must add value, prolong the useful life of the home, or adapt it to new uses. You’ll need to itemize your deductions when filing your taxes to take advantage of this option.

Fund Home Renovations

Since using your HELOC for major home renovations can help you qualify to be able to deduct the interest from your taxes, it may be a good idea to start looking at projects that you want done around the house. Adding a new addition to a home, replacing the roof, extensively remodeling your kitchen, or having a new HVAC system installed are just some examples of projects worth consideration. Don’t feel you need to stick to just the interior of your home either. Exterior renovations, such as adding a deck, can also be worth your time. Some deck features can add serious value to your home. This makes a deck a good candidate for a home improvement project funded by a HELOC.

Funding Financial Emergencies

In September of last year, nearly 7 out of 10 Americans indicated that they would have a hard time meeting financial obligations if their paychecks were delayed a week, suggesting that most of us are living paycheck to paycheck. While not ideal, it’s a way of living that works, at least until something goes wrong. A car accident, natural disasters, sudden illness or injury, or the loss of a job can all throw a major wrench into your life. If you haven’t been able to build up an emergency savings fund you can pull from, you’ll need to find the money somewhere or bills will start to go unpaid. This snowballs into issues such as defaulting on payments and credit score damage. 

If you have access to a HELOC though, you can pull from that line of credit to continue paying your bills as you work to get your feet back under you. If you choose to do this, remember that you are putting your home up as collateral against the money you’re using. Failure to make payments on the money from the HELOC you use can cause you to lose your home, which will only put you in deeper financial difficulties. If you aren’t sure you can handle paying back the money from the HELOC, it’s probably best to find a different option.

Opening up a home equity line of credit can be of great benefit to you financially if you organize your finances appropriately. Circumstances are currently favorable for opening up this type of credit line, and there are multiple circumstances in which it can be useful. Carefully consider your financial needs, your spending history, and your payment history to decide if opening up a HELOC is a good decision for you.

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