Pros and Cons of a Home Equity Line of Credit

When entering into the world of loans and lines of credit, it can help to understand a little bit about the topic before you head to the bank. Here is some information to help you learn about Home Equity Line of Credit, some pros and cons, and help you decide if it is good for you.

What is it?

A home equity line of credit, or HELOC, is actually a type of loan where the lender decides to lend a maximum amount of money in a set period of time. This amount of time is called a term. The collateral is the borrower’s equity in the (borrower’s) house. You can repay the line of credit with the interest only of the specific funds you use from the HELOC.

The difference between a home equity loan (HEL) and a home equity line of credit (HELOC) is distinct. For a HELOC, you borrow or draw money as many times as needed from a maximum amount. When using a HEL, you usually borrow a total amount with a fixed interest rate.

A  Cashout Refinance or Home Equity Line of Credit

Refinancing has the potential or fixed interest rates and monthly payments for the duration of the loan. Typically, refinance has lower interest rates than a HELOC, but both have fees.

Pros and Cons of a Home Equity Line of Credit

Pros – usually line of credit has lower interest rates, all because it is secured by the equity of the property.  It is often useful for financial needs like medical bills or treatments, education like University,  or renovation projects that are spread out over time. A HELOC can be used for anything you. It’s best suited for long-term plans. Some people have used a home equity line of credit to pay off credit card debt, as a HELOC usually has lower interest rates than credit cards. This allows you to pay off credit card debts sooner. You have an ongoing access to the money (loan).

Cons – there are some points of a HELOC you should be aware of. Because the borrower’s house is used as collateral, there is a chance of foreclosure if payments aren’t made. You also run the risk of accumulating more debt with a line of credit.

A home equity line of credit can impact your credit score by extending the amount of credit you have available. If you don’t use any of the credit after opening, your credit score could improve. On the other hand, because of a monthly payment and limit, the home equity line of credit can affect your credit score if you don’t manage it correctly.

If you wish to learn more about a home equity line of credit, contact us today for an appointment.