The Financial Benefits of a Home Equity Line of Credit
A home equity line of credit is often referred to as a second mortgage, where homeowners can leverage the home’s equity to borrow money. In fact, home equity line of credit loans first increased in popularity back in 1996. This was the first year homeowners were allowed to deduct the interest from the loan when filing tax returns.
Financial lenders offer HELOC (home equity line of credit) as a variable rate loan much like a credit card. In fact, the financial institution often issues a credit card against the loan. Every pre-approved borrower will have a specified spending limit. With a specific check or credit card, the borrower can withdraw the funds as needed.
Monthly payments made to pay down the loan will be based on the amount of funds that are borrowed, which are calculated at the current interest rate. Like a standard fixed rate loan, the home equity line of credit is issued at a set term. When that term end has been reached, any outstanding balance on the loan is required to be repaid in full.
Benefits for the Consumer
These loans offer the consumer easy access to cash. Generally, a home equity loan will be offered at an interest rate that is substantially higher than the interest rate on the first mortgage. However, it is usually substantially lower than the interest rate on a consumer loan or credit card. Because of that, it remains a popular loan option for many consumers that have the ability to borrow money against their home equity.
In fact, many borrowers will pay down the balances on their credit cards and other loans using the equity in their property through a fixed rate loan. By consolidating their debt, the homeowner can make a single payment through their home equity loan to achieve both optimal tax benefits and a lower interest rate.
Benefits for the Lender
Financial lenders gain substantial benefits every time they approve and make a home equity loan. This is because they earn substantial fees and interests that is fully secured with the collateral of the home’s equity. In the event that the borrower would default, the financial lender has the ability to foreclose on the property and get back their loan and fees.
Responsible borrowers understand the valuable tool they have in a home equity loan. This is because it provides a reliable and steady source of income that can be accessed when needed. Having the advantage of a tax-deductible benefit and low interest rate makes it a sensible alternative to high interest credit cards and other loan options.
In addition, using a home equity loan at a fixed rate is an easy way to make a large one-time purchase, such as replacing the roof on the home, or paying an unexpected medical bill. It also works well for a short-term loan that has recurring costs, including paying annual or semi-annual tuition at college for an undergraduate degree.
Every household has basic necessities including shelter, clothing, food and protection. However, shelter is the only basic necessity that has the ability to be leveraged for money. Even though there are minimal risks, with proper money management, a home equity line of credit offers a sense of financial security when the homeowner can borrow against the house.
Making timely payments every month on the home equity line of credit is a quick way to increase the homeowner’s credit score. By consolidating debt using the advantage of these available home equity loans, the homeowner can increase their FICO scores even more.