Life's big expenses, like home remodeling and home repair, can be, well, big. For people who have equity in their home, a home equity line of credit (HELOC) can help make these investments manageable. But before you sign up for a HELOC, here are some things to keep in mind:
Good stuff to know about HELOCs
HELOCs stand out as an option for homeowners for these reasons:
Lower interest rates
Interest rates affect how much you pay back over an extended period. HELOCs generally have a lower interest rate than many other types of loans (especially credit cards and personal loans). The interest rate is lower because the loan is secured, meaning your house has been put up as collateral. Secured loans are less risky for lenders, so interest rates tend to be lower.
A HELOC is essentially a home loan, so it's tax-deductible under certain conditions, generally when the money is invested in home renovation. If you're able to take advantage of this mortgage tax deduction, the HELOC can be particularly attractive.
You can pay it off whenever
Most traditional HELOCs can be paid off at any time, often without fees or penalties. Paying off early reduces the amount of interest that you pay, which makes the loan more affordable overall. HELOCs have different borrowing terms, so read the fine print to ensure that there are no early payment penalties. The Figure Home Equity Line has no early payment penalties.
Flexible loan amount
When a homeowner is approved for a traditional HELOC, the lender will set a maximum amount based on the homeowner's equity and the value of the home. You can draw from the approved amount for a limited time. The HELOC is set up so that you can borrow just what you need, and not more. This helps limit your costs, making repayment easier. Note that in this respect, the Figure Home Equity Line works differently--you receive the full loan amount at closing. You do, however, enjoy fixed interest rates† and the opportunity to borrow again once you have paid off a sufficient portion of your first draw.
The potential problems with HELOCs
You can't have the good without the bad. Fortunately, you can avoid many of these problems by borrowing responsibly, reading the fine print before signing a loan, and budgeting your money carefully. Here's what you should be aware of if you're thinking about getting a HELOC.
If you go underwater, you'll owe money after selling your home
If the value of real estate should plummet, you could end up owing more money on your HELOC (and your primary mortgage) than what you can make by selling your home. If you sell, and the amount you make isn't enough to pay off the HELOC, the remaining balance will come due instantly. For some homeowners, this can stop them from selling their homes at a time when they need to move.
The interest deduction doesn't always work
Currently, the law is written in such a way that you can only deduct your HELOC if you used it to make improvements that would raise your home's property value. Consult with your accountant before getting a HELOC to find out whether you'll be able to deduct the interest.
The bank can always lower the borrowing limit
When something changes in the economic climate, banks will sometimes lower the borrowing limit to prevent the borrower from taking out more money. If this happens to you unexpectedly, you could find yourself struggling to make a payment on a home improvement project or struggling to finish an addition you started. Please note that this does not apply to the Figure Home Equity Line since you receive the full amount of the loan at closing.
Since your home is the collateral for your loan, you could lose your house if you're not able to make your monthly payments. The best way to ensure that your home is safe is to maintain a steady income, budget your money carefully, and consult a financial planner with questions prior to taking out a loan.
How a Figure HELOC can help
Whether you have home improvement goals, need to build on to your house, or are hoping to reduce an interest rate on an existing loan, a HELOC may be a good loan for you. At Figure, our HELOC can help you achieve your goals.
Our loan is unique because it offers a fixed rate1, and you can complete your application in as little as five minutes online. Upon arrival, the funding can occur in as little as five days2. Take a look at our HELOC online to see if our loan is right for you.
1 The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.
2 Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing.