When a home equity line of credit (HELOC) is right for you

Couple sitting in dining room discussing if a home equity line of credit (HELOC) is a good decision

Is a home equity line of credit (HELOC) the best solution for your financial needs? This article may help you decide.

What is a HELOC?

A HELOC is a revolving line of credit, usually with a variable rate, secured by the equity in your home. It typically has a draw period, during which you can withdraw funds as needed up to the loan limit.

As with a credit card, paying back the funds on a HELOC may make them available for later use.

Usually at the end of the draw period, you can no longer withdraw funds and must pay back what you owe, this is called the repayment period. A HELOC typically becomes a regular 10 or 20-year loan when the repayment period starts.

Who qualifies and for how much?

A homeowner with enough equity in their property may be eligible for this type of loan. Typically, a borrower can borrow against a certain percentage of their home’s value.

What is the tax impact?

You may be able to deduct the interest you pay each year on a HELOC if your main or second home secures the loan and you “buy, build, or substantially improve” that residence. This is subject to certain dollar limitations and other conditions, we advise that you check things over with a tax advisor.

What is the biggest advantage of a HELOC?

A HELOC typically allows for repeated use of your equity, with interest only charged on the amount you borrow. You can access the cash you have available in your home equity, and you may benefit from a lower interest rate than other forms of credit.

HELOCs can be used for many purposes, including home improvement and education expenses. This loan type may be a viable option if your cash needs are large and spread out over time, such as paying college tuition by semester.

You may want to leverage a HELOC to access equity without changing the terms of your existing mortgage.

When should you choose a different type of loan?

If you want to consolidate debt, a HELOC may not be a good choice, mainly because the rate is often variable. A closed-end loan, such as a mortgage refinance, with a fixed rate may be a better solution.

Origination fees and other potential costs of a HELOC may offset its advantages.

If you only need a small amount of money for a short time, consider a credit card or a short-term loan.

What should I watch out for?

If you decide a HELOC is right for you, consider these key points:

Look for a reputable lender.
Shop around for rates and terms.
Watch out for annual, early termination, and/or prepayment fees.
Determine the details of the variable rate, if applicable.
Find out what caps and adjustment times apply to the interest rate.
Make sure the loan is paid off by the end of the repayment period. Otherwise, you may have to pay a ballon payment.

Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.