Home Equity Line Of Credit

Pros and Cons of Home Equity Line of Credit

Every homeowner is known to have great equity and is trying to make a home equity line of credit which is HELOC. This is the best option to get low-cost financing in the market. However, the main reason behind the rise in the prices of homes is that more than 50% of mortgaged residential properties were taken as equity rich, which means mortgages or other home loans covered no more than the ½ of their value.

On the other hand, earlier cash-out refinancing was considered the best way to turn equity into cash. But with the increasing mortgage rates, other options have been dragged out of the spotlight.

HELOC or home equity line of credit is known to be a type of loan that is secured by the home or works like a credit card. It is an option that allows you to get access to a revolving line of credit which can further be drawn upon for any reason virtually, like home improvements, debt consolidation, etc. It is flexible and is known to have low-interest rates as compared to various other debt products. This makes it a very popular option for every person or homeowner to easily get funding.

Understand Home Equity Line of Credit or HELOC 

A home equity line of credit is known to be a line of credit that is secured by the home you own, which can further be used for anything. HELOC is known to work similarly to a credit card, where you need to continuously tap into the line of credit or go up the credit limit during your draw period. You can easily have access to the entire credit line, where you have the liberty to spend more or less than you want. However, you need to pay interest on the amount that you are spending. This is how it is different from an installment loan like a personal home or home equity loan, which is known to be about receiving the full loan amount and that too in lump sum upfront.

HELOCs are known to work or have a 30-year model where you can get to enjoy a 10-year draw period. During this period, you can easily draw the money out from your home equity line of credit. The rest of the 20 years is where you need to pay off what you have spent. Also, there is other draw periods as well as repayment period, which you can choose.

In case you only have an interest only HELOC, then it is important to make payments that involve the interest and not the principal while you are going through your draw period. The complete principal, as well as interest payments, will begin during your repayment period.

Pros of Home Equity Line of Credit 

With this type of loan, it becomes easy to borrow around 85% of the home value, excluding the outstanding mortgage payments. In other words, this type of loan will not work if the borrower doesn’t have enough equity. It is important to have good credit to qualify for this loan and offer income proof to repay the loan.

Here are some of the pros of a home equity line of credit:

  • Low-interest rate – The exact rate of the loan can be decided after knowing the credit score. But HELOCs are known to have a lower interest rate as compared to credit cards or personal loans. Home equity line of credit is variable-rate products which means their rate is going to fluctuate over some time. But even if their rates rise, it is going to be less as compared to most credit cards as well as personal loans. However, you can easily enjoy low interest rates with home equity line of credit without fretting about anything. Plus, this can make things easy for you in the future.

  • You can lock in your rate – There are some lenders that provide you with the lock-in option or fix your interest rate on the outstanding balance. This allows you to not get exposed to rising interest rates after piling up the balance. However, this option is not always available, and it can come with some fees or high-interest rates. But can offer some stability to the borrowers to be safe from high rates.

  • Pay for what you are going to spend – Another benefit of HELOC is like any other credit card, you need to spend what you are spending on a home equity line of credit. This is somehow different from any other option for home equity financing, such as home equity loans, where it is important to pay the whole loan amount, no matter whether you have used it or not. Thus, this makes HELOC flexible and a good option. Ultimately, you get the ability to get into a massive amount of funding if you want it, but you won’t get stuck paying the amount or interest on the loan which you don’t use.

  • Use the loan for anything – You can easily use the funds or money from a home equity line of credit for anything. It could include common uses like debt consolidation, funding home improvements, getting rid of medical expenses, beginning with a new business, etc. In case you are using the funding for home improvements, then there is a possibility to get a tax benefit. You have the choice you deduct the interest paid on HELOC if you are using it to purchase, build, or even improve your home, which ultimately secures the loan.

  • Large loan amount – HELOC is known to be a secured debt product where it is essential to use your home as collateral which means you can get large or massive home amounts in comparison to credit cards or personal loans. Also, the borrowing of HELOC also depends on the equity that you own in your home. A lot of lenders require a loan-to-value ratio of around 80% and even less, which means the debts are secured by the home, which includes a primary mortgage, HELOC plan, etc. Ensure that you are not exceeding more than 80% of the home value. However, the borrowing limits can be different by lender and also depends on how much you are earning as well as your credit score.

  • Introductory offers – There are some lenders that also offer some HELOC introductory offers like waived fees, a lower interest rate for a specific time period, etc. These offers should not be the main purpose of getting the loan but as allow you to save some cash. Ensure that you get to know the offers of multiple lenders and compare the rates and fees of every lender before making a choice.

  • Flexible repayment options – There is a lot of flexibility when it comes to paying off your HELOC. The timeline of the loan depends on how much you are borrowing and the lender you are choosing. You need to make the interest payments within the draw period, which is initial ten years and can get to enjoy principal payments and a lower balance when you enter the repayment period.

Cons of Home Equity Line of Credit 

  • Overspending risk – The first con of HELOC is overspending risk. If you are not a disciplined borrower, then this can be tricky for you. HELOC allows making interest-only payments while the draw period is going on. It becomes easy to get access to money without keeping the financial ramifications in mind. This way, if you are not returning the fund, the loan can amortize, and the payments can go up.

  • Set draw period – HELOCs are known to have a set draw period that works in favor of the borrower. The 30-year model includes a 10-year draw period, and the remaining 20 years are for repayment. After getting done with the draw period, you cannot get access to HELOC, and it is mandatory to pay back the funds. This allows you to have enough repayment periods to pay back the loan amount easily. If you are not satisfied with the draw period, then HELOC is not the right option for you.

  • Simple but long application process – The home equity line of credit is known to have a simple but long application process. It involves a 30-year period which is evident to have a slightly different and lengthy application process as compared to credit cards or personal loans. It can also take a few weeks to get approved for the loan amount.


If you are known to have home equity which you can easily tap into, then getting a home equity line of credit is the best option for you. This is a great way to get massive funds to complete your projects like home renovations, consolidating debts, and much more. The above-mentioned pros and cons of these loans will help you know about HELOC in a better way and will allow you to make a great decision. However, you need to be a disciplined borrower while getting HELOC.