Should I get a home equity line of credit? HELOC Pros and Cons

You may be asking yourself, “should I get a home equity line of credit? A home equity line of credit is a credit line secured by the equity in your home. There are many advantages to a HELOC, and some disadvantages as well. Here are some HELOC pros and cons:

Pros:

  • For many borrowers, the interest on a HELOC may be deductible. If you itemize your tax deductions and you used the funds to build or substantially improve the same property you use for collateral, the interest on the loan may be tax-deductible.
  • As a secured loan, the interest rate on a HELOC may be lower than other types of loans, especially unsecured loans, or credit cards.
  • The credit is reusable. Unlike a home equity loan or mortgage, a home equity line of credit comes with a credit limit. The borrower may use up to that amount of credit at any time. The borrower may reborrow the money again at any time as well.
  • With a home equity line of credit, the borrower only pays interest on the amount due. Unlike a home equity loan where all the money is provided at once and interest is due on the entire amount, the borrower controls when the money is used from a HELOC.

 

Cons:

  • The rules for deducting the interest on home equity loans are more restrictive. Since 2017, interest for HELOCs is only deductible when used for home improvements on the same home as is used to secure the loan. This means both that the borrower must keep records and that HELOCs are not as flexible as they once were.
  • Using a house as collateral for a home equity loan means that the lender can foreclose on the home if payments are not made. Losing the home is a possibility, so the borrower must be certain that they can always make payments.
  • A home equity line of credit reduces the equity in your home. In a home sale, the HELOC must be paid first, so you may have less equity available to purchase another home or property.

When asking yourself “should I get a home equity line of credit?”, evaluate these HELOC pros and cons. Making a decision should be thought through!