How to Use a HELOC (Home Equity Line of Credit) for Winter Travel and Repairs

Nov 14, 2022
piggy bank with HELOC The Police Credit Union

The Police Credit Union offers HELOCs to members who may be planning expenditures from home improvement projects to school tuition.

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While there may be plenty to celebrate about the winter months, plunging temperatures and winter storms can also take a toll on your household budget. After all, the damp, dark days and heavy rains can be much easier to tolerate with a planned escape to a warm destination or ski resort, which can come at a sizeable sum. What’s more, inclement weather inevitably put additional strain on your home and its systems that can lead to soaring energy bills and property damage that’s best addressed before it diminishes the value of your home and results in more costly repairs.

But if it’s not comfortable or feasible to tap your savings for a much-needed vacation or home project that can’t wait another season, a potential source of funds to consider is the equity in your home. Between paying down your mortgage and market appreciation, there’s a good chance you’ve been building equity in your home if you’ve owned it for several years. Your home equity may have also increased if your property has risen in value due to property improvements you’ve made.

A Home Equity Line of Credit, or HELOC, is an effective way to capitalize on this home equity — offering a number of important benefits including the opportunity to borrow a considerable amount of money at a substantially lower interest rate than you could obtain from many other financing alternatives. Essentially, a HELOC is a type of secured loan that functions as a revolving line of credit, which is backed by the equity in your home.

Although a home equity line of credit can be used for many purposes including education expenses, medical bills or debt consolidation, it’s one of the most popular ways to fund a major home improvement project. And if you’re short on cash to cover your winter getaway, a HELOC can also be a creative way to save money on travel when compared with a typical vacation loan. For those who’d like to investigate how to use a HELOC to their best advantage this season, we’ve covered the basics you’ll want to know:

How a HELOC works

When you’re approved for a HELOC, a lender issues you a revolving line of credit up to an established limit, similarly to how your credit card company operates. But unlike your credit card account, a HELOC is secured by the current equity in your home. Over the course of time known as the draw period, you can access as much money from your HELOC as you want up to your credit limit. During this timeframe, you usually make interest-only payments on the money you withdraw. While draw periods vary across different lenders, they usually run from five to 10 years. Once the draw period ends, you begin to pay back both the amount you withdrew as well as accrued interest, typically over 10 to 20 years.

Lower risk for the lender equals a better rate for you as the homeowner

With your home as collateral, you can often get a significantly lower annual percentage rate (APR) on a HELOC than you could obtain from other financing options, such as a credit card or personal loan. This can save you substantial money with lower monthly payments and considerably less spent on financing charges overall. Moreover, you may be able to borrow more money with a HELOC as compared with other loan products, provided you have enough equity in your home.

The flexibility to take out cash as needed – and only pay for what you use

In addition to attractive rates, HELOCs offer the advantage of giving you access to a large amount of money over an extended time period while making minimal payments. Unlike a home equity loan in which you receive a lump sum payment, you can take out money on a HELOC as you need it in a series of separate withdrawals. Accordingly, you pay interest on the amount you borrow, not the entire line of credit allowable.

The interest on your HELOC may be tax deductible if you use it for home repairs and upgrades

Although there have been more restrictions pertaining to tax deductions and HELOCs since 2018, the interest from these loans can likely still be used to reduce your tax burden if you meet certain criteria. Perhaps most importantly, the home equity line of credit must be used to pay for repairs and upgrades for the property that secures the loan. As the IRS puts it, you must “use the proceeds to buy, build or substantially improve your home.” Importantly, you can’t deduct interest from a HELOC if you use the money to pay for another property (e.g., a rental or vacation home). There is also a limit to the amount you can deduct, and you’ll need to itemize deductions in order to take advantage of a tax break from HELOC interest. As of this writing, you can only deduct interest on up to $750,000 in combined mortgages, home equity loans and HELOCS ( up to $375,000 if married and filing separately). But be sure to consult a qualified professional for tax-related advice regarding your personal financial situation.

How does one qualify for a HELOC?

Typically, lenders look for a minimum of 15% to 20% equity in your home, a strong credit score, stable and sufficient income, and a low debt balance when determining whether they will approve a home equity line of credit. When it comes to your debt levels, lenders will evaluate your debt-to-income (DTI) ratio, which measures the amount of your monthly income which goes toward other outstanding debts. Typically, lenders want to see a DTI (debt-to-income) ratio that is no higher than 36%, although a qualifying DTI may be as high as 43% to 50%.

In terms of credit scores, you’ll generally need a FICO score of 720 or higher [JH1] to receive the lowest annual percentage rate (APR), although you may be able to secure a higher-interest loan with a score as low as 620. In some cases, lenders will provide loans to those with scores below 620 if they have plenty of home equity and a low debt-to-income ratio. Some steps you can take to help boost your credit score before applying for a HELOC include paying off outstanding debt, making bill payments on time, not applying for new accounts, and improving your credit utilization ratio

Keep in mind that there are limits to how much you can borrow with a HELOC, even if you have a great deal of equity. Generally speaking, a HELOC will allow you to access 80% of the amount of equity you have in your home, although lender guidelines will vary. NerdWallet’s HELOC Calculator can help you determine your eligibility for a home equity line of credit, and how much you might be able to borrow.

What you need to be aware of if you’re considering a HELOC

While a home equity line of credit can be an excellent tool for borrowing the money you need at an affordable rate, there are a few important considerations to factor into your decision making when it comes to these loans. First, bear in mind that a HELOC usually comes with a variable interest rate that fluctuates with the market, so you can’t predict precisely what your payments will be in the future. This can make it a bit more challenging when it comes to planning for your budget. However, lifetime rate caps can reduce your risk.

Secondly, although your payments will be minimal at the outset of the loan, you should be prepared that when the repayment period begins, you’ll usually need to make larger payments each month that will cover both principal and accrued interest. And if your loan requires that you pay the full balance of your loan once the draw period ends, you’ll want to ensure that you can cover this balloon payment. One way to reduce the total amount you’ll owe in the repayment period is to make additional payments during the draw period, if the lender allows for this (some charge prepayment penalties).

If you find yourself stretched to make payments during the repayment period, you might be able to renew your HELOC, or to apply for a new loan and use the proceeds to pay off the balance on your existing one. However, it’s critical to understand that your home is on the line as collateral for a HELOC. If you fail to make payments, you can put your property at risk of foreclosure. Finally, be sure to take into account closing costs and other fees when comparing HELOCs from different providers.

Think you might be ready to begin unlocking some equity in your home to cover expenditures this winter? Whether you’re seeking funds to improve the value of your property and make your home more inviting, safe, and comfortable over the holidays, or you simply need to ensure you can cover the cost of your family vacation, The Police Credit Union can help with highly affordable financing. We offer HELOCs featuring an introductory rate of Prime minus 1.00% for the first 12 months, and credit limits from $20,000 to $500,000. What’s more, an enhanced approval process can get you the funds you need fast. In addition, free checks available with your HELOC account make it convenient and easy to access this money for whatever you need. Find details and apply here. You can also call The Police Credit Union at 800.222.1391, or visit one of our branches.

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APR = "Annual Percentage Rate". Actual APR is based on your credit profile and may be higher than the lowest rate available. Posted rates may include promotional discounts and other terms and conditions. APY = "Annual Percentage Yield". Rates are subject to change without notice.

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