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Finance for Homeowners

HELOC Pros and Cons: Is a Home Equity Line of Credit Right for You?

This post weighs the benefits and drawbacks of a home equity line of credit.

As with any major decision you need to make, research is key. That’s why weighing the HELOC pros and cons can help you make an informed decision that suits your financial goals and wellness.

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What Is a HELOC?

Before we explore HELOC pros and cons, it’s important to first understand what a Home Equity Line of Credit is. A HELOC allows you to borrow money against your home, using the equity that you’ve built up.

The purpose of a HELOC is to provide you access to money for items like:

Instead of getting the money in one lump sum, like you would with a home equity loan or personal loan, a HELOC provides you with a revolving line of credit.  Much like a credit card, it  allows you to use it as needed. In fact, you don’t even have to make any withdrawals. But if you do, the money you borrow will come from your home’s equity—the greater the equity, the higher the borrowing limit.

Once you withdraw funds from your HELOC, you’ll have to start paying back the amount just as  you would a credit card–making monthly payments, including interest.

HELOC Pros and Cons

It’s essential to look at all aspects of a HELOC when determining if it’s the best option for you. While there are both benefits and drawbacks to getting a HELOC, the biggest factor at play is your financial wellness, especially at the time you apply.

For example, if you have equity in your home and have good credit standing, a HELOC can offer you the following benefits:

  • Access to a large pool of cash that’s readily available. If you are approved for a HELOC, you’ll likely receive a credit/debit card, a checkbook, or both from your lender, enabling you to access your funds whenever you need them.
  • A boost to your credit score. Qualifying for a HELOC typically requires a credit score of 620 or higher. You may even see your credit score gradually rise if you make payments on time and stay on top of managing your HELOC.
  • Possible tax benefits. With a HELOC, “you only pay interest on the amount you’ve taken out, and you’re only limited by the total amount of the loan,” according to The Wall Street Journal. Plus, in certain instances, HELOC interest may be tax-deductible[1] if you’re putting funds from your HELOC toward major home improvements.

While there are many advantages to a HELOC, they may not always benefit your specific situation. That is why it’s so important to keep in mind that a HELOC uses your house as collateral. Because of this, it’s imperative to use your HELOC funds appropriately. You must be able to pay back the amount you borrow in the time allotted. If not, you may face foreclosure.

Use our home equity loan calculator to get an idea of what numbers may look like.

Here the risks that can come with a HELOC if you’re not financially prepared:

  • Losing your home. Because your house serves as collateral, defaulting on a HELOC means you could lose your home if you fail to make your payments on time.
  • Penalties and fees. You want to always read the fine print before you close on a HELOC. HELOCs can involve penalties and fees, including: annual fees, prepayment penalties, or inactivity fees.
  • Risk of more debt: If you plan to use a HELOC to consolidate debt and pay off high-interest credit cards, just make sure you don’t rack up even more debt.

Is a HELOC a Good Idea for You?

Once you weigh the HELOC pros and cons, you can start to answer the question: Is a HELOC right for you?

A HELOC may be a good option if:

  • You are using funds from your HELOC toward home improvement projects that could increase your home value.  Plus, a HELOC put towards home improvements could have tax benefits.
  • You have a lot of equity in your home. The more home equity you have, the more money you may be able to borrow with your HELOC.
  • You have a good or excellent credit score, which could help you secure a lower interest rate.
  • You have a solid financial history and are reliable when it comes to making monthly payments. Since your home serves as collateral with a HELOC, making payments on time and in full avoids putting your home at risk.
  • You want to be prepared for any large expenses like weddings, cars, or loan consolidation, in addition to having a pool of money to dip into for emergencies like medical bills. 

The bottom line: If you have weighed the HELOC pros and cons and can be prudent with your finances, a HELOC could be the right financial tool for you as a homeowner.

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[1] Prosper does not provide tax advice. Please consult a tax advisor regarding the potential deductibility of interest and charges.

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.

Eligibility for a home equity loan or HELOC up to $500,000 depends on the information provided in the home equity application.  Loans above $250,000 require an in-home appraisal and title insurance.  For HELOCs borrowers must take an initial draw of $50,000 at closing. Subsequent HELOC draws are prohibited during the first 90 days following closing. After the first 90 days following closing, subsequent HELOC draws must be $1,000 or more (not applicable in Texas).

The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Spring EQ borrowers get their cash on average in 26 days. The time period calculation to get cash is based on the first 6 months of 2022 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications.

Spring EQ cannot use a borrower’s home equity funds to pay (in part or in full) Spring EQ non-homestead debt at account opening.  For HELOCs in Texas, the minimum draw amount is $4,000. To access HELOC funds, borrower must request convenience checks.

Interest rates may be adjusted based on factors related to the applicant’s credit profile, income and debt ratios, the presence of existing liens against and the location of the subject property, the occupancy status of the subject property, as well as the initial draw amount taken at the time of closing. Speak to a Prosper Agent for details.

Qualified applicants may borrow up to 95% of their primary home’s value (not applicable in Texas) and up to 90% of the value of a second home. Home equity loan applicants may borrow up to 85% of the value of an investment property (not applicable for HELOCs).

All home equity products are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.

Prosper Marketplace NMLS Prosper Marketplace, Inc. NMLS# 111473

Licensing & Disclosures NMLS Consumer Access  

 

 

Prosper Funding LLC

221 Main Street, Suite 300 | San Francisco, CA 94105

6860 North Dallas Parkway, Suite 200 | Plano, TX 75024

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