Planning matters

Home Equity Line of Credit

This past year many of us have started looking at our homes in new ways. Maybe there is a desire to make your outdoor space more comfortable for safe social gatherings. For others, it may be transforming areas of your home to make them more adaptable for remote learning or working from home. One option homeowners have available to finance the potentially larger projects: a home equity line of credit. 

A home equity line of credit (HELOC) is a tool that allows qualifying homeowners to borrow against the equity in their home. Unlike a home equity loan with a lump-sum withdrawal, with a HELOC borrowers can access funds in varying amounts over the course of the draw period (typically 10 years). After the draw period ends, the outstanding HELOC balance, if any, must be repaid over a period of time.

Here are a few additional features of a HELOC:

  • The interest rate is typically variable and is based on a base interest rate (often the Prime rate) plus/minus some amount of margin. Always ask your lender how often the interest rate can change so you aren’t surprised by adjustments.
  • Although they are most commonly used for projects that add value to the home, HELOC withdrawals can be used for any purpose.
  • The amount of payment due each month is based on the outstanding balance. So, as you pay the loan off, the minimum payment might actually go down. And as you borrow more against the HELOC, your payment amount will rise.
  • Interest paid on a HELOC may be tax deductible in certain circumstances. Talk with your planner or tax advisor for guidance on your situation.
  • Depending on the lender, the HELOC will likely have an annual fee to remain open. If you are an existing customer of the institution, ask if you are eligible for lower fees. Also, compare lenders to get the best deal.

In some cases, even if you could pay for a project or repair up front, it may be wise to use a tool like a HELOC to preserve your savings or spread out the cost. This is especially true if a credit card is your alternative payment option. While the way credit cards and HELOCs are used is similar, the interest rate on a HELOC tends to be more favorable.

If you’re looking to get started on a project or have questions about how to finance a repair, reach out to your planner to see if using a HELOC is a good option for you.

We are unable to invest proceeds from a HELOC in the stock market or purchase securities with those funds.