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How a HELOC Works

What is a HELOC and how does it work?

Someone on TV spoke about using your home equity line of credit to pay bills, and that this will save individual's money by lowering overall interest on a loan. Could you expand on this, and how does this work?

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Highlights

  • Learn what a HELOC is and how it works?
  • Consider the risks of turning unsecured debt into secured debt?
  • Be aware of the tax benefits of HELOCs.

A home equity line of credit, also known as a HELOC, is a line of credit from which you can withdraw money again and again. You can think of a HELOC as a secured line of credit against your home. In other words, you will be borrowing money against your home in order to pay off other bills. In many ways, a HELOC is just like a credit card, but the interest you pay is tax-deductible. You will close on a HELOC only one time, but if you decide after a few months that you need to withdraw additional money, you will be able to do so up to the value of the loan. That is to say, if you close on a HELOC for $60,000 and over a period of time pay back $13,000 toward the principal, that $13,000 is available to be drawn again at any time.

A HELOC can be most useful if you are taking on a project, such as home repair, that has the potential of unforeseen expenses, or paying off high interest rate credit cards. A HELOC offers you the flexibility to borrow again and again. You may even be able to secure a HELOC that carries a low interest-only payment allowing you to borrow more and still have a manageable payment amount each month. Drawing against the equity in your home typically saves you money on the interest youÂ’re paying for your purchase power, and as always, the interest you pay on any type of home mortgage is tax-deductible, offering an additional incentive.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation. If a situation arises where you are unable to make the HELOC payments, you put your home at risk, by exposing yourself to the risk of foreclosure!

I encourage you to read an article on our site, All About Home Equity Line of Credit Loans, to learn more about this topic.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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