A home equity line of credit (HELOC) can be a great option to consider when financing home improvement projects where you need funds at different times or covering the costs of education, weddings or real estate down payments. Before moving forward, however, it’s essential to understand the ins and outs of a HELOC to determine if it’s the right option for you.
Learn more about a home equity line of credit and find answers to your frequently asked questions in this blog from Fidelity Federal.
What Is a Home Equity Line of Credit (HELOC)?
A home equity line of credit, or HELOC, allows you to borrow or draw money multiple times from an available maximum amount. In other words, it’s a revolving line of credit similar to a credit card, but a HELOC is secured by the equity in your home.
Equity is defined as the amount of money your property is currently worth minus what you still owe on your home. Home equity lines of credit typically have variable interest rates and payments, which means they will go up or down over time.
Many home equity lines of credit have an initial draw period where you can borrow from the account. Some lenders require you to pay small, interest-only payments during the draw period.
Once the time ends, often after 10 years, you may be able to renew the credit and continue to withdraw funds. Otherwise, you have to start repaying the balance due, typically within a 20-year repayment period.
If you can’t repay the amount borrowed, you may place your home at risk of foreclosure. Additionally, many lenders will make you pay off your credit line if you sell your home.
Talk to a financial advisor or trusted lender about your options before applying for this type of loan. Remember also to find out any other additional fees or closing costs you may incur with a home equity line of credit.
Frequently Asked Questions About Home Equity Lines of Credit
Q: What is the difference between a home equity line of credit and a home equity loan?
A home equity line of credit allows you to borrow or draw money multiple times from an available maximum amount, and repay the funds at variable interest rates. Closing costs are often smaller than home equity or other types of one-time loans.
A home equity loan provides a lump sum of money, usually with a fixed interest rate and monthly payments. Closing costs may be similar to your first mortgage closing costs, typically around two to five percent.
Q: How much of my home’s equity will a lender let me borrow?
Many lenders will allow you to borrow up to 85% of your home’s equity based on how much equity you have and your credit score.
A lender may adjust this amount based on the combined loan-to-value ratio, or the amount you owe on your home divided by the market value of your home. If the ratio is high, lenders may lower the amount you can borrow.
Q: What is the length of the draw term for a home equity line of credit? Can I pay it down without penalty and retain it for future use?
Fidelity Federal offers 10-year draw terms where you can pay down your line of credit at any time without penalty and still retain it for future use.
Q: What amount do you pay interest on?
Unlike a home equity loan, where you pay interest on the entire loan amount, you only pay interest on the money you use in a home equity line of credit.
Q: What is one key benefit of a home equity line of credit?
Flexibility! Once approved for a home equity line of credit, you can borrow funds at any time. This type of loan can be an emergency source of funds for job loss, medical expenses or large home repairs. Just remember to have a plan in place to repay the funds quickly to avoid financial challenges down the road.
Q: Is the interest paid on a home equity line of credit tax deductible?
The Internal Revenue Service (IRS) allows you to write off some of the interest as long as you itemize your deductions and meet specific requirements, including using the funds to substantially improve your residence. Visit this page on the IRS website or contact your tax advisor for more information.
Discover the Home Equity Loan Option that’s Right for You
Fidelity Federal is committed to finding the best loan solution for you. We can help fund your home improvement projects, borrow funds for unexpected purchases or buy your dream home. Contact us today to get started!