Unlike a home equity loan, HELOC offers a line of credit that you can ask from the financial institution when you need it. Although this is not a traditional method for a loan, it has some benefits that make it more beneficial.
You might be qualified for a low APR
Traditional mortgage rates have been the highest in recent years. So, this is the perfect time to take advantage of home equity lines of credit. In the usual bank, as a lender, you have to have a certain level of credit score. If you do not meet the score, you will not be able to take a mortgage loan from the bank. But HELOC offers loans if you have low credit. But you have to pay the loan interest on time to take a further loan. one of the best HELOC rates falls below 5 percent. Meanwhile, the average APR on variable-rate credit cards is around 16 percent.
Interest may be tax-deductible
HELOC already offers a tax leave for the lenders. But, if you meet a certain condition like if your circumstances fit the Tax Cuts and Jobs Act of 2017, you can still reduce interest paid on a home equity line of credit. A situation like investing the loan money into home improvements. IRS has also provided a statement that interest payment can be reduced if it is used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
Flexible repayment options
HELOCs often provide flexibility in terms of how you pay them off. The loan payment schedule can be fixed according to the time of the lender. HELOCs can last for up to 30 years.
Why should lenders avoid HELCO?
Traditional home loans offer a fixed interest rate. It doesn’t matter how much the interest rate has grown since you have taken the loan from the bank, the installment rate stays the same for the client. But this can’t be said for HELCO. This means that your rate can go up or down based on the decisions of the Federal Reserve. You can take the HELOC loan with a certain interest, but the interest rate can change over time.
One disadvantage of HELOCs often stems from a borrower’s lack of discipline. Because HELOCs let you make interest-only payments during the draw period, it makes it an easy impulsive situation to pay a large amount of installment. Which eventually turns into a large amount. If the borrower doesn’t pay the interest on time, it is also possible that the rat can grow over time. If the borrower is not returning funds to this line of credit, then the loan eventually begins to amortize and the payments go up significantly.