With high interest rates driving up the cost of borrowing money, more people are tapping the equity in their homes. The most common way to access it is through a home-equity lines of credit, or Helocs.
A Heloc works like a credit card, but since it is backed by your property it generally offers a much more favorable interest rate. The average Heloc rate is 7.7 percent, according to Bankrate.com (via the Wall Street Journal), compared with the average 19 percent on a credit card or a 10-plus percent average personal loan rate. Owners get a credit line based on their home equity, but don’t have to use all or even any of available funds.
The ready access to money that Helocs provide can be particularly appealing during a time of economic uncertainty—as long as borrowers refrain from treating their home as an ATM. Lenders tend to tighten credit standards during a downturn so it may be wise to apply for a Heloc now if you’re worried about needing the funds later.
A Heloc is different from a home-equity loan, which typically has a fixed rate and gives borrowers a lump sum upfront. The interest rates on Helocs are typically variable, meaning they will fluctuate as interest raises change more broadly. Other factors go into the rate, including your credit score, debt-to-income ratio, and the amount you are seeking to borrow.
One of the most common uses for Helocs is to fund home-improvement projects, which have the added benefit of potentially increasing your home’s value. Interest payed for home improvements has the added benefit of being tax-deductible.