What Are the Benefits of a HELOC?

There are numerous benefits that can make a HELOC preferable and advantageous relative to other types of loans. The main advantages are as follows:

• Flexibility. You can spend what you need to use a HELOC and can limit the loan amount to what you need. You can also wait to draw on your HELOC until the need arises, rather than being forced to take out a set loan all at once. You can pay back the money you draw on a HELOC at any time during the payment period, and you will additionally have an extended repayment period to pay off the loan. The repayment period is itself typically long, increasing your flexibility.

• Low Interest Rates. Because the HELOC uses your home as collateral, and lets you draw only as needed, a HELOC typically is a lower risk to lenders. For this reason, lenders will tend to offer lower interest rates for HELOCs than for other types of loans. Therefore, a HELOC is a useful way to pay off your credit card debt, which tends to have a higher interest rate. However, you should be careful when paying off credit cards with a HELOC. If you continue to use credit cards without paying off what you draw from your HELOC, your loan amounts can grow quickly. You can also use HELOC to make home improvements and repairs, increasing the value of your property.

• You Have the Right to Pay Early. Although your HELOC will usually require you to make minimum regular payments, you can always choose to pay more than that minimum to complete repayment early and lower your overall interest payments. On the other hand, many borrowers pay their HELOC balance in more regular installments like other loans, completing repayment over a longer period of time. In these cases, the HELOC functions very similarly to other large loans, but typically has a lower interest rate.

• No Payment Without a Balance. A HELOC functions just like a credit card and you can pay the balance completely at any time. By paying off your HELOC in full, you will not have to make any payments on it unless you draw on the HELOC again. However, note that some HELOCs require you to maintain a minimum balance, in which case this advantage does not apply, as you will have to make payments on that balance.

• Tax Deductible. Like other home loans, interest payments on a HELOC are tax deductible as long as you itemize your deductions. Note that many other types of credit such as credit cards are not tax deductible, and so a HELOC can save you additional money compared to other loans.

• Chance to Cancel the Loan. A HELOC that you take out on your primary residence can be canceled within three days without incurring a fee or penalty. You can choose to change your mind without giving a reason as long as you inform the lender in writing within this three day grace period. The lender must cancel the HELOC and also repay you any fees you already paid to set up the HELOC. This can be helpful if you find a better loan offer within those three days or decide that you do not need the loan.