Rising home prices in recent years also mean rising home equity, as the price of your home has likely increased well above the amount you owe on your mortgage. If you have equity, it’s worth considering opening a HELOC, or home equity line of credit. This is a low-cost way to borrow money with many benefits.
Low Interest Rate: While most typical lines of credit, like credit cards, charge an average interest rate of 10% APR**, a HELOC has a much lower interest rate. This allows you to carry debt with minimal cost. Rather than hunting around for the best deal on each new loan or line of credit you need, you can just open the HELOC and have the convenience of a low interest rate whenever you need it.
High Credit Limit: Your credit limit on a HELOC is going to be higher than the typical credit card because it is based on the equity in your home. Typically, your mortgage balance plus your HELOC is capped at 80% of the market value of your home. If your mortgage value is low, you can tap into a large line of credit with a HELOC. This is very convenient because you don’t have to worry about reaching your credit limit.
Deductible Interest: Most types of consumer borrowing, including auto loans, credit cards, personal loans, and parent loans for college, do not have deductible interest. However, because a HELOC is tied to your home, the interest paid on the HELOC balance may be an itemized deduction on your tax return, just like the interest on the primary mortgage.^
Flexible Borrowing: You can use the money you borrow from a HELOC for anything, or even for several things. Many people open a HELOC for one major purpose, like making home improvements, going on a vacation, buying a vehicle, paying for college, or consolidating high-interest debt. Once you have the HELOC, though, you can continue to tap into available credit anytime, which is ideal for costs that arise periodically.
**National credit card rates for April 29, 2014 reported by bankrate.com
^This article is not tax advice. Please consult a tax advisor for more information.