FDIC-Insured – Backed by the full faith and credit of the U.S. Government5 Myths About Home Equity Lines of Credit
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The spring season of growth is just around the corner. It’s the ideal time to make home improvements, shed extra debt, and take other steps to reach your goals and spruce up your financial life.
Spring is also the season for a popular financial tool to help you accomplish that: a home equity line of credit or HELOC.
But how much do you really know about HELOCs?
You may know that a home equity line of credit lets you tap into the equity you’ve accumulated in your home to borrow. But there are a lot of misconceptions about HELOCs. Let’s look at five common ones to ensure you understand how they work before you borrow:
Myth 1: Home equity lines of credit are the same as home equity loans.
Fact:Though both let you borrow from the equity in your home, they are different. Unlike a home equity loan that lets you access the money you borrow in a lump sum, a home equity line is a revolving line of credit that allows you to borrow and repay funds over and again. Generally, HELOCs offer a variable rate of interest while home equity loan rates are fixed.
Myth 2: A home equity line is essentially a second mortgage.
Fact: That’s true. A home equity line is a second mortgage secured by your home. So, make sure you borrow for good reasons and pay on time, every time.
Myth 3: You can only use a HELOC to make home improvements.
Fact: Not true. Though the word home is in the name, you can use home equity for a variety of other purposes, such as college expenses, debt consolidation, a wedding, or vehicle purchase. How you use a HELOC is up to you.
Myth 4: You pay interest on the amount of your line.
Fact: That’s false, too. HELOCs work very similar to credit cards. You only pay interest on the amount you use not your available credit limit. So, if you have a $50,000 line and only borrow $10,000, you’ll only pay interest on the $10,000.
Myth 5: Interest on HELOCs is always tax deductible.
Fact: That’s no longer true. According to the IRS, interest on HELOCs is deductible only if the borrowed funds are used to buy, build, or substantially improve the home that secures the HELOC. So, before you borrow, consult your tax advisor.
Fact: This is just a small sample of what you should know before you apply for a HELOC. To learn more about how HELOCs work to determine if one is right for you, talk to us today.