Confused about HELOCs? You’re not alone. There are many HELOC myths that are leading to confusion. A HELOC or Home Equity Line of Credit enables you to tap into the equity of your home to access cash for just about anything you need. Unlike a Fixed Home Equity Loan, a HELOC enables you to access your available cash as you need it, similar to a credit card. We’re going to bust some HELOC myths to help you better understand them.
Six HELOC Myths Debunked
1. A HELOC and a Fixed Home Equity Loan are the same things….False. What’s similar is that both Fixed Home Equity Loans and HELOCs enable you to cash into the equity of your home to access funds. That’s where the similarities end. A Fixed Home Equity Loan provides a borrower with a one-time, lump-sum payment. All funds must be taken at once and interest starts to build as soon as the funds are disbursed. Fixed Home Equity Loans are similar to Mortgages in that funds are borrowed for a specific term of time. HELOCs, on the other hand, are not disbursed in a lump sum. They work more like a revolving credit line. You borrow only as you need the funds. For instance, you may borrow a portion to pay tuition costs for one semester. Then, you may not borrow again until the following semester. You have a specific draw period, or a number of years, during which time you can borrow or draw on the available line. When that period ends, you can no longer borrow and will focus on the payoff. Another big difference, HELOCs have a variable interest rate, while Fixed Home Equity Loans typically have a fixed interest rate.
2. A HELOC can only be used to pay for home improvements. This is another HELOC myth that is false. While a HELOC can absolutely be used for home improvement projects, it can also be used for many other things. HELOCs can be used to pay medical expenses, fund a college education, consolidate debt, or for any larger expenses, such as a wedding or vacation.
3. The interest paid on HELOCs is not tax-deductible…Actually, sometimes it is. According to the IRS, you can deduct the interest paid on HELOCs if they are used to “buy, build, or substantially improve a taxpayer’s home that secures the loan.” Think bathroom renovation or a new roof. You can learn more about the tax benefits related to a HELOC from the IRS website, or by speaking to your Tax Advisor. You can also read our blog Are Home Equity Loans Tax Deductible to learn more.
4. A HELOC will hurt my credit score….Actually, if treated responsibly, a HELOC should not affect your credit score. In fact, payment history is the most important thing impacting your score, so when you make regular on-time payments to the loan, it may actually help you improve your score. What may impact your score is maxing out your line and not focusing on paying it down. Credit utilization is another important factor in a credit score. It’s the amount of credit you are using as compared to your revolving credit limits. Keep this in mind if you are concerned about your credit score.
5. Excess fees and closing costs make a HELOC too costly. This may be true at some financial institutions, but not all. Credit unions typically offer members lower rates on loans and lower fees than big box lenders. Speak to your Credit Union Representative to learn more about the costs involved in borrowing.
6. You need to own your home for a long time to access the equity. That’s not necessarily true. It all depends on the equity built. If you put down a significant amount in the form of a down payment or the value of your home has increased significantly, you may be able to access the equity faster than you think. Speak to your lender to learn more about equity requirements.
Benchmark FCU is here to help
At Benchmark FCU, we have been providing financial solutions for our members and supporting the local community for 80 years. Visit us online to learn about the benefits of our Ultimate HELOC.