5 Myths Busted About Home Equity Lines of Credit

by Kathy Passman 17. November 2016

5 Myths Busted About Home Equity Lines of CreditIt’s funny how sometimes a myth can be taken as fact if it’s repeated often enough. It can even gain “conventional wisdom” status.                         

Sometimes it doesn’t matter much. It’s pretty harmless to think a tooth will dissolve overnight in a glass of Coca-Cola, and it may do some good if it keeps you away from the sugary drinks. But believing banking myths can hurt your personal finances – and there’s nothing good about that.

For example, a number of myths swirl around home equity lines of credit (HELOCs), and many of these misrepresent what is actually a safe and secure way to borrow money. With a HELOC, you can access a line of low-interest credit secured by your home’s equity – much like you would with a credit card, only the interest payments are tax-deductible and the interest rate is much lower. You should consult a tax advisor regarding the deductibility of interest and charges under the plan.

So today we want to take a few minutes to bust a few HELOC myths – and let you know the truth… 

Myth No. 1: You Can Only Use a HELOC to Pay for Home Improvements

It’s true that HELOCs were initially created with home improvements in mind. However, the fact is that you are allowed to use your HELOC to pay for just about anything – from debt consolidation to your children’s college tuition. That said, most advisors think homeowners should use their HELOCs for expenses that add value to your finances. For a list of our own suggestions, click here.

Myth No. 2: A HELOC and a Home Equity Loan Are the Same Thing

With a home equity loan, your lender will provide you with a one-time lump sum. You pay that fixed-interest loan off over time, month by month. With a HELOC, however, the bank extends to you a line of credit that you can draw upon whenever and as often as you like, within your draw period. While the interest rate is generally low (much lower than that of a credit card), it fluctuates along with the prevailing rate.

Myth No. 3: A HELOC Will Hurt Your Credit Score

On its own, a HELOC won’t do anything to your credit score. It shows up to credit scorers no differently than a credit card. But just as with any other debt you incur, late payments on your loan or maxing out your HELOC may affect your credit score. It’s wise to ensure that you do not advance your line over the approved credit limit as this also would reflect on your credit report.

Myth No. 4: You Can Pay Off Your HELOC by Making Minimum Monthly Payments

With most HELOCs, if you make only the minimum payment each month, you’ll only cover the interest. Once the “draw period” – the five- to 10-year stretch of time when you can use your HELOC – ends, the principal starts becoming due. Depending on how much you’ve used, that can be a lot of money. So the best strategy, much like with a traditional credit card, is to make much more than the minimum payment each month.

Myth No. 5: HELOCs Are Difficult to Get

Taking out a HELOC is not risk-free. But if you use your HELOC conservatively and pay more than the minimum due each month, it is among the best loan options out there.

If you’re ready to apply for a HELOC, or for more information, please contact us.

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