Credit Equity Home Line

The home equity line of credit, frequently referred to by its initials, HELOC, is an extremely popular method of tapping into the equity in one’s home. It combines the benefits of other home equity loans, including low rates and potential tax deductibility with the flexibility of a credit card.

An equity line loan is a debt instrument where one is given a pre-approved credit limit. At any point in time during the draw period of the loan, one can draw on the line up to the credit limit frequently by simply writing a check against the line. What makes a home equity line different from a personal line of credit is that it is collateralized by one’s house. Because it carries collateral, it typically has significantly lower rates than a personal line. To protect the financial institution, they will typically require that the total of the first mortgage, second mortgage and any HELOC’s limit be at or below 80% of the appraised value of the home.

Current home equity line of credit rates can vary from as little as 4.5% to as high as 8%, depending on one’s region, the amount to be borrowed, one’s credit, and the lender chosen. In fact, those with FICO scores below 680 could find it challenging to get any type of HELOC. Although rates vary greatly from lender to lender and from situation to situation, one common thread is that all rates are adjustable. Home equity line of credit loans are typically based on the prime rate plus a certain amount, called a spread. For instance, if today’s prime rate is 3.25% and the lender has a 199 basis point spread, the total rate on the loan would be 5.24%. Many loans have a floor below which the rate cannot fall, and just about every loan has a ceiling above which the rate cannot be raised.

The largest benefit of a HELOC is that it gives a homeowner access to cash which they do not have to use. Given a construction project, one can pay for items as they are needed or completed, and avoid paying interest for the entire cost of the project from day one. This can yield significant savings. This benefit is its downside, though. If one has a home equity line, there is little to stop a lender from reducing the size of the line or removing all permission to borrow from it.

Within certain limits, the interest on a home equity line of credit can also be tax deductible. If one is using the proceeds from a HELOC withdrawal to pay for the purchase or improvement of a home, all of the interest is deductible, up to $1,000,000 for a married couple. Even if one is using a HELOC simply to consolidate credit card debt, the interest on the first $100,000 of that debt would be tax deductible for a married couple. For single individuals, the limits are halved. This tax savings can significantly reduce the effective interest rate of the home equity line, as well.