A home equity line of credit (HELOC) is a line of credit secured through your financial institution on your home that gives you a revolving credit line to use for large expenses. A HELOC typically has a lower interest rate than other credit lines due to the nature of the loan. A home equity line of credit will allow you to borrow money over time as opposed to a standard home equity loan which provides you a lump sum of money to use at one time.
With a HELOC, you’re borrowing against the available equity on your home, using the house as collateral to access the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card. So, you can essentially borrow against the line of credit multiple times if needed, accessing as little or as much as you need throughout the draw period. The average draw period on a home equity line of credit is 10 years, and the average repayment period is 20 years.
Can I Use My HELOC for Anything?
Like a home equity loan, a HELOC can be used for anything you want; however, it’s best to use your home equity line of credit on long-term, ongoing expenses like home renovations, medical bills, or even college tuition for you or your family members.
How Do Payments Work on HELOCs?
In most cases, your minimum monthly payment will be only the interest during the draw period. During your repayment period, you’ll be responsible for paying back the principal which can result in higher monthly payments or a balloon payment at the end of the draw period. A balloon payment towards the end of your loan will keep your monthly payments at a lower rate. If you pay on the principal in the draw period, the HELOC will be available to borrow again before the repayment period begins.
Can I Pay Off a Home Equity Line of Credit Early?
Before trying to pay off your principal, make sure you alert the lender of your intention to pay off the loan earlier than its 10-year lifespan. Because HELOCs operate like credit cards, paying off your principal will add credit to your line.
Once you have entered the repayment period and are paying off your principal, you will also be paying interest. Keep in mind, some lenders will charge prepayment penalties when paying off your loan too soon. Make sure to read your loan terms carefully, but slightly over-paying each month is typically accepted.
Is a HELOC Tax Deductible?
Interest on a home equity line of credit is tax-deductible if you use the funds for renovations to your home. Anything that you put towards “buy, build, or sustainably improve” projects qualifies for a tax deduction. The money must be spent on the property whose equity is the source of the loan. Taxpayers can only deduct interest up to $750,000 of residential loans ($350,000 for married taxpayers filing separately). This total includes all residential debt-mortgages as well as home equity loans or lines of credit. Older mortgages (before 2018) may be covered under the previous $1 million dollar limit ($500,000 for married taxpayers filing separately).
Does a HELOC Require an Appraisal?
Most of the time, an appraisal is necessary in order to determine the value of the home’s equity. Lenders will typically require an appraisal from a licensed real estate professional in order to verify through realistic judgment and research – the home’s equity within the market; however, data can also be accessed within public records which can help solidify the loan amount.
What if I Never Use My Home Equity Line of Credit?
You are not required to use your HELOC; however, you must pay off the loan in its entirety if so.
Can I Open a HELOC Loan on a Home that is Paid Off?
While you can not sell your home or open a second mortgage while your HELOC is open, you can open a HELOC on a home that is paid off to use for any purpose. If your goal is to extract cash from the home’s equity to pay off further renovations, debt consolidation, or repairs, this can be an extremely beneficial option. Unnecessary expenses may arise, so accessing your home’s equity through a line of credit over time can be ideal. Because the interest rates for a home equity line of credit are flexible, borrowers will see monthly payments rise or fall during the term of the loan. One thing to note is that if you end up borrowing over 80% of the home’s equity, leaving 20% or less of equitable funds, your lender may require you to purchase Private Mortgage Insurance (PMI).
Apply for a HELOC at Members Exchange Credit Union in Jackson, MS
Interested in applying for a home equity line of credit? Members Exchange Credit Union is your premier HELOC lender near Jackson, MS. We’ll coach you through the process step-by-step and address any additional concerns you may have. Our home equity and mortgage experts are happy to answer questions and help you access the line of credit you need on your home. MECU is built on trust and transparency with our members. We have the expertise needed to assess your particular financial situation and point you in the right direction. Give us a call or stop by one of our local branches in Byram, Pearl, and Ridgeland today to get started!