What Is a Home Equity Line of Credit & How Does It Work?
Learn what a HELOC can do for you.
Many homeowners in need of financing aren’t aware that they could literally be sitting right underneath the cash they need. A home equity line of credit (or HELOC) allows you to tap the equity you’ve built up in your home to pay for a wide range of expenses.
HELOCs have become more popular in recent years as many people choose to remodel their existing homes rather than move to new ones. Rising home prices in many parts of the country and interest rates that remain near historic lows also make home equity lending especially popular and beneficial right now.
How HELOCs work
As the name implies, a HELOC is a line of credit that allows you to borrow up to a predetermined amount of money using the equity you’ve built up in your home as collateral. You can simply write yourself a check or access funds via online banking whenever you like and for whatever reason you desire.
A HELOC is a revolving line of credit, so you can borrow funds again as needed up to your credit limit as you pay it down. This makes HELOCs an extremely flexible and useful financing tool for many people because you don’t have to reapply every time you need to borrow money.
In addition, you could receive tax breaks by using a HELOC to borrow funds. Before the Tax Cuts and Jobs Act, interest paid on HELOC loans was tax-deductible regardless of the reason the money was borrowed. The legislation temporarily suspended this deduction for some, but not all, types of HELOC borrowing. However, if you use HELOC funds to buy, build or substantially improve your home, you can still take the deduction.*
When to use a HELOC
One of the biggest benefits of HELOCs is that there aren’t any restrictions on how you can use the money you borrow. Here are five common reasons homeowners borrow money using a HELOC:
1. To finance home improvements and renovations
This is typically the most common use of HELOC funds by many borrowers. It usually makes sense to tap into home equity to pay for improvements and renovations that will boost the value of your home while making it a more enjoyable place to live.
It can take years to save enough money to pay for major home improvement projects like bathroom and kitchen remodeling, basement finishing, room additions, and building decks and patios. With a HELOC, there’s no need to wait — you can move forward with these kinds of projects as soon as you and your contractor are ready.
2. To consolidate debt
Many people today carry balances on multiple high-interest credit cards. This is not only costly, but it’s also inconvenient. You can consolidate this kind of debt into a single low-interest loan by using HELOC funds to pay off all of the balances at once. This will lower your interest expense while simplifying bill payment.
3. To help pay education expenses
Saving for college or private school tuition is challenging for many families. Even if you are contributing money to a Section 529 college savings plan or a Coverdell Education Savings Account, you might be coming up a little bit short in your education savings goals. Tapping a HELOC is one way to help make up any education savings shortfalls you might be facing.
4. To pay for big-ticket items
Many people use unsecured loans or even credit cards to pay for major purchases like cars, boats, RVs, motorcycles and expensive vacations. A HELOC may be a smarter and more cost-efficient way to pay for these kinds of items since the interest rate may be lower - possibly much lower.
5. To cover emergency expenses
Many personal finance experts recommend building up an emergency savings fund to cover unexpected large expenses like major home or car repairs or large out-of-pocket medical expenses. But this isn’t always easy to accomplish, and doing so can take months or years. Establishing a HELOC before emergency expenses like these arise can give you a convenient financing option other than high-interest credit cards.
Cadence Bank can help
Talk to Cadence Bank about how we can help you establish a home equity line of credit. Our HELOCs offer competitive interest rates, low closing costs and easy access to funds any time of the day or night.
*Please consult your tax advisor about tax deductions.
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.