Home Equity Lines of Credit (HELOC)

by Miranda Marquit, Contributor

Most people like the idea of making improvements to their property. However, it can be very expensive to finance certain home improvements, especially if remodeling is involved. One of the ways you can acquire money to finance such home improvements is by using the equity in your home.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is a revolving loan based on the ownership you have in your house. Your equity is determined by subtracting the balance of your mortgage loan from the market value of your home. For example, if your home is worth $180,000 and you still owe $150,000 on the mortgage loan, you have $30,000 of home equity. While most lenders will not approve you for the full equity amount, you can still get a substantial loan.

Because a home equity line of credit is revolving, you can withdraw money as you need it. Some lenders will issue a debit card linked to your HELOC for convenient access to the funds. Using that debit card, you can withdraw cash up to a pre-determined amount and make payments on the loan. As long as you maintain a sufficient balance, you can continue to use that money without applying for a new equity loan.

Home equity lines of credit come with an interest rate, but in many cases you can deduct the interest from your federal income taxes. HELOCs also generally have lower mortgage rates than other loans (especially credit cards). While you may use a home equity line of credit for something other than home improvements, remodeling is the most popular reason that homeowners choose HELOCs.

Warnings About HELOCs

While a home equity line of credit can be very useful, it is important to be aware of the challenges that can arise. Never forget that a HELOC is a loan secured by your home. If you cannot make the payments on your equity loan, you could lose your home. Thus, you should be very cautious with the amount of money that you borrow against your home.

It’s also important to be wary of possible changes to your HELOC. The mortgage lender may alter your home equity line of credit ― closing it, or reducing the amount of money available. If home values fall, you may find that your funding is reduced because the mortgage lender doesn’t want to risk you owing more on your home than it is worth.

A home equity line of credit can be a great source of financing, especially if you are making home improvements. But as always, it is important to be careful and only borrow what you really need.