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Module 5
Life as a Homeowner
Benefits of Home Ownership
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Home Equity Lines of Credit (HELOC)

Similar to a Credit CardA home equity line of credit (HELOC) works something like a credit card, with a few differences. For example, credit cards are unsecured loans, while a HELOC is secured by your home.

Pay Interest Only on What You BorrowIn most cases, as you repay what you have borrowed, your HELOC is restored in that amount and you pay interest only on what you actually borrow. You are allowed to borrow up to a certain amount, called your “line amount” during the early years of the HELOC (usually five or 10 years). After that, you enter the “repayment period” where you may not withdraw funds and are obligated to repay the principal and interest and any fees associated with the loan. The repayment period is usually a 10- or 15-year period.

Your Rates May Increase
HELOCs are variable rate debt and are usually tied to the Prime Rate. The interest rate usually adjusts each month based on the Prime Rate and the withdrawal balance on the line amount, plus fees, if applicable. So, as with other variable or adjustable rate debt, careful thought needs to be given to your ability to handle monthly increases if the interest rates adjust higher.

Debt is Secured by Your HomeBecause the debt is secured by your home, usually all or part of the interest is deductible regardless of how you use your HELOC. See a tax advisor or call the IRS for details on the deductibility of interest on a HELOC.

Protect Your Home
If you are considering tapping into your equity, be sure that you clearly understand the terms of the loan. When you use your home as collateral for a loan, you generally have the right to cancel the credit transaction within three business days if you change your mind. Consider carefully: failure to repay at the end of the term could result in the loss of your home.

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