The Pros and Cons of a Home Equity Line of Credit

Published: 03/22/2023 By: Allegius Credit Union

The Pros and Cons of a Home Equity Line of Credit

 

Did you know that a home equity loan and a home equity line of credit are two different things? Sometimes the terms get used interchangeably, but they are different!

 

A home equity loan is a lump sum that is given to the borrower at the beginning of the loan term, and is to be paid back monthly.

 

A home equity line of credit allows you to borrow smaller amounts over time, so you’re only taking on the funds you need, when you need them. This results in a lower monthly payment to help avoid unnecessary debt and interest payments.

 

A lower monthly payment and only borrowing what you need right now sounds pretty good, right?

 

What exactly is a home equity line of credit (HELOC)?

A home equity line of credit is a line of credit (similar to a credit card), that allows you to borrow against it when you need to. HELOCs come with a variable interest rate, which means your monthly payment will change depending on your current interest rate and how much you borrow at a time.

 

You will typically be given a maximum amount you can borrow, just like a credit card, but this is based on the equity you have in your home. You can choose to use as much or as little of that amount as you want, and will only be charged interest on the amount you’ve actually used. Allegius offers competitive rates on HELOCs, and can help you navigate the entire process. Learn more about our HELOC offerings here.

 

Now, let’s talk pros and cons of HELOCs

 

Pros:

 

Potential for a lower interest rate

With a home equity line of credit, you could potentially get a lower interest rate than a traditional credit card. If you’re looking to consolidate debt, a HELOC might be the right way to go.

 

Borrow what you need and nothing more

The nice thing about a HELOC versus a home equity loan is you borrow only what you actually need. Remodeling a kitchen or bath? You may not know the total of that cost up front, which makes a HELOC the perfect solution. Only borrow what you need, when you need it.

 

A boost for your credit score

Adding a home equity line of credit to your borrowing history, and making on-time payments, can help boost your credit score. But that’s only if you make on-time, regular payments!

 

Cons:

 

Your home is the collateral

When you take out a home equity line of credit, you are offering up your home as the collateral. While a HELOC can offer you a lower rate, you are still taking a risk. If you cannot make the monthly payments on your HELOC, you risk foreclosure on your home.

 

Your rate can change

Home equity lines of credit come with variable rates. That means your rate can go up or down at any time. Even if you take out a HELOC with a low rate, that could change when it comes time to start repaying it.

 

You could overspend

Because home equity lines of credit allow you to only make interest payments during the initial draw period, it can be easy to overspend. Be careful about only borrowing what you actually need, versus what you want.

 

Allegius offers both home equity loans and home equity lines of credit. Learn more about both programs here.

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