About Home Equity Lines of Credit

By Maureen Carrington

Despite the most recent trend in real estate values, many of we Northwood residents have been fortunate to enjoy and maintain a substantial increase in property value since we purchased our homes. You can use this increased home value to increase your financial security.

A Home Equity Line Of Credit (HELOC) is a loan that is secured by the equity in your house. When you get a HELOC, the lender will provide you with a checkbook that you can use whenever the need arises. Having this easy access to funds is a great comfort if you are suddenly confronted with expenses due to job changes, medical costs, tuition, or if you would like to make improvements to your home. You can also take out a HELOC against a vacation home or investment property.

Opening a HELOC typically costs you nothing as long as you leave it open for three years. You are not required to ever use it, just don’t close the account. Since you only pay interest on the outstanding balance, simply having a HELOC with a zero balance costs you nothing, yet provides a great “what if” fund.

If you have credit card balances, a HELOC is a great way to reduce the amount of interest you pay every month. Compared to the prevailing credit card interest rates of 12-18 percent or more, a HELOC’s rates are tied to the “Prime Rate,” which is currently 5.25 percent. Depending on your personal situation and credit score, your HELOC rate could be as low as 4.75 percent (Prime minus .5 percent) or up to 6.25 percent (Prime plus one percent).

Another advantage to a HELOC versus other loans is that interest on the first $100,000 of a HELOC balance is fully tax deductible for almost all people. This lowers your effective interest rate even further. (If a HELOC balance is over $100,000, then there are additional requirements to meet in order to maintain deductibility. The requirements for these higher balances are too lengthy to list here, so feel free to call me or consult with your accountant, tax adviser, etc., for details.)

Right now, interest rates are trending downward and it appears that the Federal Reserve may continue to drop rates in the near future to help stimulate the economy. This will cause the Prime Rate to fall, which, in turn, lowers the interest rate on your HELOC. What is interesting is that credit card companies are keeping their rates high. So if the current trend continues, a HELOC becomes a better option than carrying a credit card balance every month.

While most HELOCs interest rates are adjusted according to the Prime rate, others give you the additional option of converting the existing balance to fixed rate at any time you want. This is a no-cost feature that can save you plenty of money in the future.

If you are interested in reducing monthly payments, my recommendation to you would be to take out a HELOC with the lock feature and “float” down as interest rates fall. Then, when it appears that the Federal Reserve is about to start raising rates, you should “lock” in the low interest rate available at that time. That will help protect you from payment increases as the rates rise. ■