When Should Home Equity Lines of Credit Be Used?
Interest-Only HELOC Loans, Borrow Money Cheaply, Tax Deductible
Jul 4, 2009
A Home Equity Line of Credit (HELOC) is a flexible loan or credit line secured by a lien on the family home. It is a line of credit that can be used at any time during the defined 'drawing period' for home improvements, debt consolidation, buying a car or any financial shortfall. It is an any-purpose loan that works comparably to a credit card. Granted on an interest-only basis, it is cheap, flexible, affordable and even tax deductible. A HELOC loan is only available to a homeowner who has sufficient equity available; not surprisingly, default rates are very low.
Are Home Equity Lines of Credit Suitable for Debt Consolidation?
A Home Equity Lines of Credit is regularly used to consolidate credit card debt. The principle benefit is that a homeowner will make a single, more affordable monthly repayment. HELOC loans are available from just 8% and are available on an interest-only basis. Turning unsecured into secured debt is rarely advisable. Problems can also occur if charge cards are left active as there is a huge temptation to re-use the same line of credit leading to an increase in overall personal debt.
HELOC Loans for Home Improvements
Using a Home Equity Line of Credit may increase the value of a property, but this isn't always the case. Consider the following figures from the Royal Institution of Chartered Surveyors (RICS) before taking out a HELOC loan for home improvements. See below:
- Landscape garden- Costs £900 and adds £6,000.
- Double glazing- Costs £7,000 and adds £7,500.
- New bathroom- Costs £3,000 and adds £4,000.
- Off-road parking- Costs £650 and adds £10,000.
- Converting a garage to a gym- Costs £25,000 and adds £0.
- Loft conversion- Costs £28,000 and adds £10,000.
- Extension into garden area- Costs £35,000 and adds £10,000.
- Building a basement- Costs £50,000 and adds £4,000.
- Fitted kitchen- Costs £12,000 and adds £8,000.
- Wooden flooring- Costs £1,200 and adds £0.
* Figures provided by the Royal Institution of Chartered Surveyors (RICS)
A Home Equity Line of Credit to Buy a Car
Homeowners who wish to buy a car can either use personal savings, a car loan, car finance or a HELOC loan. Whether a Home Equity Line of Credit is the right option will depend upon a number of factors, including credit history and the rate of interest available. Neither a car loan or HELOC loan can be written-off by filing for bankruptcy; car financing and credit card debt are treated very differently. It is worth remembering that a HELOC loan is interest-only which means that the debt could have greater longevity than the car itself.
Interest-Only Piggyback Loans to Help with Expenses
A piggyback loan is an additional HELOC loan to supplement the primary mortgage. This additional, flexible borrowing source can be used to cover other broadly associated expenses, such as the cost of mortgage insurance or Private Medical Insurance (PMI). Payments are currently tax deductible so it remains an efficient way to borrow money.
HELOC Loans Make Moving House More Difficult
Taking out a HELOC loan means that less home equity will be available to a homeowner in the future. Whilst a Home Equity Line of Credit provides increased financial flexibility, this home equity erosion may mean that it is more difficult to move house later on. This is particularly relevant in a falling market as no asset rises year after year for an indefinite period. Rising house prices can cause a homeowner to borrow money when it isn't really necessary to do so.
Whilst a Home Equity Line of Credit is a flexible, efficient and cost-effective way to borrow money, it does have its pitfalls. A HELOC loan should not be taken out by those who are prone to impulse buying. Failure to keep-up with monthly repayments could potentially face mortgage foreclosure. Think carefully before turning unsecured credit card debt into a debt that is secured on the family home.
Source
Royal Institution of Chartered Surveyors (RICS) - April 2009
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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