The following points constitute the merits of HELOC financing:
1. Easy and Quick Access to Funds: With a home equity line of credit, accessing money from your account is easy and almost immediate. Whenever you need extra cash for a project or an emergency, simply write yourself a check or use a debit/credit card to withdraw money which makes this process simple and convenient.
2. Flexibility: The interest rate on a home equity line of credit is variable. However, some HELOCs have the option of converting to a fixed rate, which can minimize the risk of increasing rates. Also, a HELOC provide the ability to the borrower to use a revolving line of credit and match the offered finances with his needs. In short, a HELOC permits borrowing "on demand" and repaying on a schedule determined by the borrower.
3. Long Withdraw Period: Home equity lines of credit offer a long withdraw period. Once a request for a home equity line of credit is approved, the borrower is free to draw on the account for a set period of 5 to 25 years.
4. Available to people with bad credit: A HELOC is also available to people with bad credit history, and can even be used to improve credit as long as payments are made on time. Since the underlying security is a property and the line of credit given out is usually less than the equity value of the home or land, lenders have little risk offering these types of loans to everybody.
5. Tax deductible interest: The popularity of HELOC financing is further supported by the fact that HELOC interest paid is usually deductible under federal and most state income tax laws which lowers the average borrowing cost.
6. Low fees and closing costs: HELOC usually comes with fee waivers and low closing costs as banks don’t undergo the complete closing and underwriting steps required on first mortgages. Additionally, no prepayment fees are required in case of early prepayment.
HELOC financing is a practical and economical way to get access to relatively cheap financing especially in mortgage refinance cases where the total financial burden gets lowered. However, this form of financing hides many traps if the borrower does not fully consider his financial position and the particular implications of this loan. Overborrowing and compounding interest over the course of many years can cause significant financial strain. Needless to say that failing to repay the HELOC or meet loan requirements may result in foreclosure so it pays to have sufficient financial self-discipline.
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