Key Pros And Cons Of Home Equity Lines Of Credit (HELOCs) To Consider

Need to fund a major kitchen remodel, cover the costs of a primary bathroom addition or pay off high-interest credit card debt? A home equity line of credit, better known as a HELOC, can help.

Also referred to as a second mortgage, a HELOC is a bit like a credit card but with your home’s equity as your credit limit.

Like all home equity loans, they come with their own sets of pros and cons. Is a HELOC the right choice for you? That depends on what you need to fund and how comfortable you are with using your home as collateral.

At this time, Rocket Mortgage^® does not offer HELOCs.

What Is A Home Equity Line Of Credit (HELOC)?

A home equity line of credit (HELOC) allows you to borrow against the equity you’ve built in your home. Unlike a home equity loan, a HELOC offers a credit line based on your equity.

Say you owe $200,000 on your mortgage and the value of your home is worth $300,000. This means you have $100,000 of equity. Lenders won’t allow you to take out a HELOC for the full amount of equity built in your home, but you might qualify for a home equity line of credit with a credit limit of $55,000.

You can then borrow against this credit limit to pay for anything you’d like, including major home renovations, paying off high-interest credit debt or covering a child’s college tuition.

How Does A HELOC Work?

With a HELOC, you only pay back what you borrow. For example, you might have a credit limit of $55,000. If you only use your HELOC to pay for a $30,000 kitchen renovation and a $10,000 master bathroom upgrade, you’ll only need to pay back the $40,000 you’ve spent.

HELOCs feature two phases. The first phase, known as the draw period, allows you to borrow money with your line of credit. This typically lasts 5 – 15 years. During this period, you'll only need to make payments that cover the interest on the amount that you have borrowed.

When the draw period ends, your HELOC enters the second phase, known as the repayment period, which usually lasts 10 – 20 years. During this period, you can no longer borrow money and need to repay what you've borrowed. You'll do this by making monthly payments that go toward paying down your principal balance, with interest.

A Summary Of HELOC Pros And Cons

As with all mortgage products, there are advantages and disadvantages with HELOCs.

Pros Of HELOC Loans

The key pros of home equity lines of credit primarily lie within the interest rates, as well as flexibility in what you borrow and how you repay.

Lower Interest Rates

HELOCs typically come with lower interest rates than other forms of debt, such as credit cards and personal loans. However, your interest rate depends largely on the market, your three-digit credit score and how much debt you face each month.

If you want the lowest possible interest rate with your HELOC, pay all your monthly bills on time and pay down as much of your credit card debt as you can. These two steps will help you build the strong credit score that lenders want.

Tax-Deductible Interest

A HELOC can also pay off come tax time. That’s because the interest you pay on a HELOC might be tax-deductible.

When Is A HELOC Tax-Deductible?

You can deduct the interest you pay on a HELOC if you’re borrowing money to build, buy or substantially improve your home. This requirement began in the 2018 tax year and is in effect through the 2025 tax year. You can’t deduct the interest, though, if you use your HELOC for other uses, such as paying off credit card debt or covering a child’s college tuition.

An example of improving your home would be adding a primary bathroom, renovating a kitchen or installing a second-floor addition. The combination of your HELOC and primary mortgage must also not exceed limits set by the IRS in order to take advantage of the full deduction.

Flexible Repayment Options

With a HELOC, you have flexibility when paying off what you borrow. You typically are required to only cover the interest on the amount that you've borrowed during your loan's draw period. But you can pay more, applying these extra dollars to paying down the principal balance of the amount that you've borrowed. You'll then have less to pay during your loan's repayment period because you’ll have already lowered the balance on what you owe.

Ability To Borrow Only What You Need

With a home equity loan, you borrow a set amount of money in one lump sum. With a HELOC, you instead get a line of c