12 Things to Know About Home Equity Loans and HELOCs

Be smart if you tap home equity loans and HELOCs.

Jun 28, 2014 at 1:00PM

Credit: StockMonkeys.com.

If you need a significant chunk of money and are unwilling to borrow it or to charge it on your credit cards, what can you do? If you're a homeowner, you may be able to tap the power of a home equity loan or a home equity line of credit, or HELOC. But don't do so without learning more about them. Here are some of the key things to know.

  1. There are two main kinds of home equity borrowing: a home equity loan secured by the equity in your home and a HELOC. With the former, you borrow what you need in a single lump sum, while the latter allows you to borrow various sums over time as needed. The former has a fixed repayment schedule, while the latter is more like having revolving credit via a credit card. The former will often sport a fixed interest rate, while the latter is more likely to have a variable rate.

  2. That interest rate will depend in part on how credit-worthy you are. Those with high credit scores (such as in the 700s and above) can expect to be offered the best rates for home equity loans and HELOCs. Those with less pristine credit records will fare less well. Those planning on taking out home equity loans should check their credit reports and scores well before doing so in order to have time to correct any score-lowering mistakes. Note, too, that the rates, terms, and fees that make up the deal you're offered will vary by lender, so do shop around. Don't focus solely on the interest rate.
  3. Another consideration is that home equity loans and HELOCs can be easier to qualify for if your credit is poor. The terms might not be fabulous, but you may not have many more attractive options.
  4. Interest rates for home equity loans and HELOCs tend to be higher than those for regular mortgages, but they're also generally considerably lower than some alternatives, such as credit card debt. Thus they have some appeal when you need money.
  5. Not so long ago, before the recent credit crisis, lenders would often permit people to borrow more than 100% of the value of their home. Now they're being a little more careful, and you should expect to be able to borrow up to about 85%. Some lenders will calculate your maximum by taking a percentage of your home's value and then subtracting what you still owe on it. So if they have a limit of 80% and your home is valued at $100,000, your maximum possible loan value is $80,000. But if you owe $50,000 on the home, you're now looking at a limit of up to $30,000.
  6. Of course, you shouldn't aim for the maximum, as defaulting on a home equity loan can result in the loss of your home. That's a big deal and should factor heavily in your decision making.
  7. Know, too, that a lender can cancel a HELOC before you're done using it, which can cause financial pain. Home equity loans are sturdier, with various terms locked in.
  8. Meanwhile, if you sell your house while you've borrowed against it, you'll be expected to pay off those debts pronto.
  9. A home equity loan can be canceled within three days of being taken, per federal law, if it's secured by your primary home.
  10. Interest paid on home equity loans is generally deductible, up to $100,000 in home equity debt. 
  11. Some unscrupulous lenders out there prey on naive or older borrowers. The Federal Trade Commission has said to watch out for practices such as encouraging you to borrow (or refinance) often; adding other products to the loan package, such as insurance; ignoring your ability to pay and lending you too much so that you end up losing your home; or simply charging excessive fees. Another racket is a self-described handyman ringing your bell and offering to make repairs or renovations while helping you secure financing through some connection.
  12. Sometimes the borrower is the one making the regrettable move. For example, home equity loans taken out to finance renovations may not make your home sell for as much as expected. Borrowing via home equity loans or HELOCs in order to pay off other, higher-interest debt can be effective, but only if you have the discipline to pay the new debt off. Otherwise, you can keep spiraling deeper into debt.

Home equity loans and HELOCs can make your financial life much easier or much worse. Use them prudently -- and learn more before jumping in.

Be Smart with Your Taxes, Too -- and Save Big Bucks
You may be focused on borrowing and home equity loans right now, but keep up with tax issues, too, in order to keep more of your money. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about a simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Longtime Fool specialist Selena Maranjianwhom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers