Pros and cons of home equity lines of credit

© Anatoly Tiplyashin woman with little house on hand
© Anatoly Tiplyashin
Advantages of home equity lines of credit
Flexibility
You can draw upon home equity lines of credit at any time during the draw period. Unlike other types of loan agreement, you only need to pay interest on the money that you have spent.

Low interest
Provided that you have a good credit history, a HELOC loan offers an affordable way to borrow money.

Interest only or repayment
If you need to reduce the repayments, you can switch to an interest-only deal.

Repayments
In order to aid affordability, you can spread the repayments over the full term of your mortgage.

Debt repayment
If your circumstances change, you can repay the debt at any time with a lump-sum payment. This is particularly useful if you were to receive some inheritance or large work-related bonus.

Tax deductible
Current Internal Revenue Service (IRS) rules allow you to deduct any interest from your taxes. This wouldn’t be the case if you took out an unsecured loan from a bank or peer-to-peer lender.
Disadvantages of home equity lines of credit
Foreclosure
If you fail to keep-up with the repayments, the lender can repossess your home. It would then be sold for fair market value at an auction and you’d be legally responsible for any repossession deficiency.

Duration
Extending the term improves affordability, but it also means that you’ll pay the lender more cumulative interest.

Variable rate of interest
The interest rate is variable. Although rates are currently low, the repayments could increase if inflation starts to rise.

Moving property
Using up some of the equity in your property makes it more difficult to move to a new home.

Little or no equity
If you don’t have any equity, you cannot get a secured loan against your home.

Bad credit history
If you have experienced credit problems during the last seven years, the cost of borrowing will be significantly higher.

Impulse buying
The flexibility of the agreement means that it is particularly tempting to buy things that you want but don’t urgently need. It is the homeowner’s equivalent of a credit card.