HELOC: What You Should Know

Over the past two weeks, we addressed what a HELOC is and how the HELOC process works. This week, it's time to address some additional factors you should be aware of before you commit to a HELOC. It's no secret that the U.S. economy was depressed for several years. During the economic slump, lending guidelines tightened significantly. Since the recent economic resurgence, the lending floodgates have reopened, including the reappearance of more expansive financing options, including some HELOCs. Lenders and borrowers may both be pleased about the increased availability of HELOCs*. However, there are factors you should consider before committing to HELOC financing in the current lending environment. These include the following.

1: HELOC May Be Tax-Deductible**

The Tax Cuts and Jobs Act substantially changed the way that mortgage interest can be deducted. It also introduced modified rules about HELOC deductions. According to the IRS, HELOC interest is tax-deductible only if you use the credit line "to buy, build or substantially improve the taxpayer's home that secures the loan." Therefore, if you opt to pay down personal expenses or make peripheral purchases with the money, it may not be tax-deductible. In other words, you need to make sure you're aware of the tax laws when you're filing your tax returns, and don't just automatically deduct interest tied to your HELOC.

2: Be Wary Of Predatory Lenders

While most HELOC lenders work diligently to make the process and agreement homeowner friendly, there are predatory individuals in every industry. One of the primary benefits of a HELOC is the ability of borrowers to pace themselves by withdrawing only the amount needed at a given time. That allows you to manage the monthly payment as part of your budget. Unfortunately, some aggressive lenders and loan products use unfavorable tactics on borrowers. For example, some HELOC agreements require applicants to take a minimum withdrawal lump sum beyond their immediate needs. That policy effectively turns the HELOC into more of a home equity loan than a line of credit. Before you commit to your loan product, make sure it's not another type of loan disguised as a HELOC. You should also talk through all of your loan disclosures with your lender to ensure you understand everything before you sign.

3: Double-Check Interest Rates for Your HELOC

As discussed in our prior blogs about HELOCs, some products include escalating interest costs and balloon payments. These can result in serious financial setbacks for unsuspecting homeowners. Being mindful of the real monthly costs associated with your loan is essential. You may initially be attracted to the low up front interest rate. Make sure you pay attention to any special features that may cause the rate or payment to increase later in the repayment process. Another consideration to keep in mind is that interest rates can vary greatly between lenders. You should work with your trusted local mortgage loan professional who can assess your personal situation and guide you to the right product for your needs. At any time during your loan process, you should feel comfortable with asking questions. Don't be afraid to ask about your interest rate options, and any features tied to a specific rate, such as an interest-only or balloon payment.

4: Hidden HELOC Fees Matter

If you have ever shopped for a credit card, you probably know that some have annual minimum fees and others do not. There's no reason to pay those hidden fees when other outfits are waiving them. Just like with a credit card, when you're shopping for a HELOC, you should compare upfront and hidden fees between lenders before you commit. If you see a fee on your disclosures and you don't know what it is for, ask. It's your mortgage professional's job to explain the loan process, including the disclosures and the associated costs of the loan.

5: Payback Matters

Perhaps the one issue that trips up borrowers more than others is calculating their ability to repay their loan. No one knows your personal finances and habits better than you do. Sit down and think through your long-term goals and potential expenditures. Take the time to envision how a line of credit fits into your financial health and well-being. A HELOC may be your perfect solution to your financing needs, or you might be better off with a different type of financing. Our Mortgage Advisors are available to talk through all of your financing options.

Do you have questions about if a HELOC might be the right choice for your financing needs? For this and any other home finance questions, please fill out the form below or contact us today!

*This product is offered via a lender partner/broker channel. Subject to the terms and conditions of that lender, not Pacific Residential Mortgage, LLC. Not all applicants will qualify. This is not a commitment to lend, terms and conditions can change without notice.

**The interest on the portion of credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal Income Tax purposes. The consumer should consult a tax adviser for further information regarding the deductibility of interest and charges