Is a Home Equity Line of Credit Right For Me?

By Dieter Scherer

First of all, it’s important to know exactly what a Home Equity Line of Credit (HELOC) is.

A HELOC is a type of home loan that works similar to a credit card. Instead of receiving all of the money up front as you would with a conventional mortgage, you apply for a line of credit that allows you to borrow up to the limit the bank approves. A HELOC offers flexible payments, which vary based upon the amount you borrowed and how much principal you want to pay down each month.

Benefits:
Lower Interest Rates – Because a HELOC is secured by your home, it offers a lower interest rate than a credit card and generally less than auto loans and other personal loans.
Flexible Repayment – Most HELOC’s allow flexibility with your payments. Options range from conversion of the loan to a fixed rate home loan to interest only payments.
Tax Deductible – Unlike credit cards and other personal loans, if you take a HELOC out on your personal residence, the interest on it is usually tax deductible.
High Credit Limits – Depending upon the value of your home, HELOCs can give you access to tens of thousands of dollars in home equity.

Dangers:
Variable Interest Rates – Unlike a conventional home loan, most HELOCs do not have a fixed rate option. Instead, the rate on HELOCs vary based upon the current prime interest rate. As a result, if the interest rate increases you would have higher payments, which could cause problems if you are have cash flow issues.
Foreclosure – The interest rates on HELOCs are lower because the loan you are given is secured by your home. Therefore, if you cannot pay back the balance of your HELOC, you risk the bank repossessing your home, just like with a normal mortgage.
Frozen Credit – Lenders have the right to cut an unused credit line. During the recent financial crisis, when property values were declining, many lenders exercised this right, leaving many homeowners without a financial safety blanket. Many people used their HELOC as their sole emergency fund and did not have access to this credit when they needed it most.

So, is a HELOC right for you?
Any financial decision should always be taken with your full financial situation in mind. It’s important to understand the risks associated with a HELOC when you are considering what type of loan to pursue. If you have a need for credit and have enough cash flow to pay both the payment for your current mortgage and the HELOC, a HELOC might be right for you.

Wayne Zussman is a Certified Financial Planner™ and President of Triton Wealth Management, a fee-only financial planning and investment firm. Triton has offices in Annapolis, Kent Island and Gaithersburg, MD. Wayne can be reached at 410-202-2110 or wayne@tritonwm.com

 

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