Considering a Home Equity Line of Credit

Considering a Home Equity Line of Credit

Now may be a very good time to consider accessing the equity in your home. In recent years, central Indiana communities experienced increased home values. For many homeowners, this meant the equity in their homes increased dramatically, in some cases. During the most recent low mortgage rate environment, many homeowners took advantage of the increased equity and record-low first mortgage rates by choosing to refinance their first mortgages. As mortgage rates have increased over the past year, the appeal of refinancing has dropped. However, home values remain high, and that means there may still be equity to access through a home equity line of credit, or HELOC.

What is a HELOC? It is a type of loan secured by your home that gives you access to a revolving line of credit that you can draw upon for virtually any purpose, from home improvements to asset acquisitions to debt consolidation. A HELOC is different from an installment loan. With an installment loan, you receive the full amount of the loan upfront and repay principal and interest in monthly installments. With a HELOC, you can borrow funds, repay and reborrow, up to the credit limit, throughout the draw period. You pay interest only on the total amount you borrow. This flexibility, along with lower interest costs, make it a popular tool for homeowners who need access to liquidity.

When deciding if a HELOC is a good option for you, consider:

Pros

• HELOCs typically have a lower interest rate than credit cards or personal loans. Most interest rates are variable, but you may have the option to fix your rate.
• Interest is due and payable only on the amount of money you've borrowed. This reduces the overall interest expense, assuming you only draw what you need.
• HELOCs can be used for any purpose, and if you borrow for home improvements, you may get a tax benefit.

Cons

• It's important to understand the terms, or rules, associated with the product you select. For example, there may be minimum withdrawal requirements and/or a set period for drawing the funds.
• There are typically fees and closing costs associated with a HELOC, just as with a first mortgage.
• Your home is collateral for the loan. If you default on the terms, you risk losing your home.

The flexibility of a home equity line is one of its most attractive features. However, it does require discipline to only borrow what you can comfortably repay. When considering a HELOC, think honestly about your financial habits, the potential risks and how you intend to use the money you borrow. Being aware of your personal financial situation and goals can help you decide what's best for you.

To further explore if a HELOC is right for you and to get started, contact one of our experts.