Home Equity Line of Credit Advantages

Borrow What You Need When You Need It

Predicting the exact amount of funds you need for a new project or venture can be difficult. You may under borrow or even worse, borrow too much. Paying interest on money you didn’t need or having to take out another loan isn’t good for the checkbook. That’s why an equity line of credit may make more sense. It has more flexibility than a one-time loan.

With a credit line, you can write checks against an approved line of credit. The amount of credit is based on the amount of equity in your house. When projects or needs have varying cash flows, a credit line allows you to borrow at specific times and for specific amounts. This takes out the guesswork and lets you pay interest on only funds you need.

Home Equity Line Interest Rates

Most equity line rates are variable and tied to the Prime rate. This is one of the best home equity line of credit advantages. When rates go down, your interest rate will go down as well.

That doesn’t mean rates can’t go up. When they do, so will the rate on your equity line. However, most equity lines have an upward cap on the interest rate, so you do have some protection if rates rise.

Some equity lines offer fixed interest rates if that makes you more comfortable, but they are not common and you might be giving up the advantage if rates drop while you use the line of credit.

Home Equity Line of Credit Advantages with Taxes

The two major components of an equity line are interest and principal. Neither adds to your tax bill. While other loans like tuition may have some tax stipulations, interest on a home equity line is tax deductible. Unless your loan amount is in excess of $100,000, your interest payment will give you some tax savings come the following April.

The principal amount of your equity line (if under $100,000) is not considered income and therefore not taxable. It is not tax deductible like your interest payment, but it won’t hurt your tax bill either.

Feel Comfortable Knowing Laws Protect You

The Federal Truth in Lending Act can offer you peace of mind when capitalizing on home equity line of credit advantages. The Act requires lenders to give you every bit of information regarding your equity line plan. Lenders must disclose the annual percentage rate (APR), terms of the plan, and any costs or fees for opening the line. Lenders must also go into detail about interest rates and plan features.

There is also a 3-day grace period in case you decide a home equity line isn’t for you. If you open a line, you have three days to cancel in writing and receive refunds of any fees you paid to open the account.

Once your account is open, the lender may not change any of the terms of the plan. The lender cannot accelerate payment of your balance or terminate your account.

Benefit from Home Equity Line of Credit Advantages

If you’re in financial duress, thinking about a project or venture, or getting some hefty tuition bills in the mail, consider the advantages of a home equity line of credit:

• Flexibility – perfect for needs with varying cash flows.
• Interest Rates – Variable rates allow your borrowing rate to go lower as rates fall. Rate caps can protect your upside.
• Taxes – Interest is tax-deductible and principal is not considered income.
• Laws – The Truth in Lending Act protects you from financial shenanigans and makes sure lenders honor the terms of your agreement.

Always borrow responsibly and remember no matter how many home equity line of credit advantages there may be, you do have to eventually pay the money back. However, a line of credit may make things easier on your checkbook and help you get through major life events.