Real estate has long held the title as one of the best investments a person can make to grow and maintain financial wellness, especially in the United States. Investing in real estate not only helps you diversify your financial portfolio, but it can also help you build equity which, in turn, boosts your net worth.
Speaking of equity, you’ve probably heard of home equity loans, or HELOCs. HELOCs allow you to borrow the equity you’ve built in your home and turn it into cash that you can draw from whenever you need it. However, especially when it comes to properly handling your home’s equity, it’s important to know all your potential choices before coming to a decision. One option that we speak with many of our members about is called an interest-only HELOC.
What is an interest-only HELOC?
With an interest-only HELOC, your initial monthly payments only include the accrued interest on the money that you’ve borrowed. This interest-only period is called the draw period. During the draw period, you’re free to draw funds from your line of credit as needed, and you’ll make interest-only payments in return.
When should I take out an interest-only HELOC?
Every financial situation is different, but typically, we recommend members who have a good credit score and at least 15 to 20 percent equity in their homes to apply for an interest-only HELOC. Not only that, but we strongly encourage applicants to discuss interest-only HELOCs with one of our representatives to ensure it’s a smart choice for your financial situation –at the end of the day, we want you to feel confident about choosing an interest-only HELOC (and not only that, we want to make sure that you have the means to afford the repayment when the draw period ends!)
What are the benefits of an interest-only HELOC
With an interest-only HELOC, there are quite a few benefits to consider.
Flexible payments: if you’re looking for a reliable source of cash with flexible payments, you may be a great fit for an interest-only HELOC. Since the draw period only requires you to make payments on the interest that accrues, your monthly payments are far lower in the beginning of the loan term. Plus, if you want to pay any additional money towards the principal, you’re always welcome to do so. However, once your HELOC draw period ends, you will have to pay both principal and interest, which will subsequently increase your monthly payment.
Lower interest rates: HELOC interest rates, generally, are markedly lower than credit card rates. This is especially advantageous towards members who have a lot of upcoming expenses that they’d like to pay off quickly. At the end of the day, a HELOC will actually be cheaper than a personal loan or a credit card would be.
Tax-deductible home improvements: If you and your family are in desperate need to get some home renovation projects done and you’d like to use your HELOC funds to finance it, we have some great news: it may be tax-deductible! According to the IRS, borrowers must use their HELOC money to “buy, build, or substantially improve the taxpayer’s home that secures the loan”. This is a HUGE benefit to using a HELOC since you’ll be able to deduct the interest you’re charged.
How Do I Know if An Interest-Only HELOC is Right for Me?
Generally speaking, we like to recommend interest-only HELOCs to members who:
Have fluctuating income
Plan on selling their home after renovations
Need a large sum for an important investment
Need to minimize monthly payments
Make a down payment on a second home before selling their first home
If you’re interested in learning more about interest-only HELOCs and determining whether or not your financial situation would be a good fit for this type of line of credit, stop by any RMLEFCU branch and ask to speak with a staff member. All of our RMLEFCU representatives are Certified Financial Counselors and would love to give you a hand.
If your mind is made up and you’d like to apply for an interest-only HELOC now, please visit this link. If you have any questions, please don’t hesitate to call us at (303) 458-6660.