Is a Home Equity Line of Credit Right for Me?

October 10, 2022

There are a number of loans designed specifically for homeowners, but a home equity line of credit (HELOC) may be one of the easiest to secure. HELOCs let you borrow based on the equity (the difference between your home’s value and your owed mortgage balance) you have already built into your home—sometimes at a lower interest rate than other options. At Renasant Bank, we’re here to help you determine if a home equity line of credit is right for you.

What is a HELOC loan?

A home equity line of credit, or HELOC, is a home equity loan that lets you withdraw money as you need it, then repay the funds with interest—just like you would a credit card.

The line of credit is secured by the equity you have in your home (i.e., how much of the mortgage you've paid back). The more your home is worth, typically the larger the line of credit. You may also find that lenders offer interest rates lower than their rates on other types of personal loans. Some rates may even be close to standard mortgage rates.

A HELOC is different from a home equity loan. A home equity loan is also secured by the value of your home, but it pays out in a single lump sum of cash. Home equity loans also come with closing costs. HELOCs, on the other hand, tend to have fewer closing costs, if any.

How are these home equity loan types structured?

HELOCs can offer a few big advantages over other types of personal loans. Because HELOCs are secured by your home, interest rates tend to be friendlier. If you use your HELOC to make improvements to your home, some of the interest may be tax deductible*.

The majority of home equity credit lines have two stages: a draw period and a repayment period.

The draw period commonly lasts for 10 years, though it may be extended. During this time, you can access your available credit whenever you choose. Often a HELOC will only require small, interest-only payments during this first draw tranche, though you may have the option to pay extra and have it applied directly toward the principal.

The repayment period commonly lasts for 20 years. During this period, you aren’t allowed to spend any more funds. You’ll make regular payments on the principal and interest until the balance is repaid.

At Renasant, we offer flexible terms that our lending experts can customize to fit your needs and circumstances. Our professionals will help you understand how to make your HELOC work best for you.

How much can I borrow?

Much like your mortgage, the eligibility and terms of your HELOC are decided by several factors.

With a HELOC, your maximum line eligibility is based on a percentage of the equity in your home. You’re most likely to qualify for a HELOC if you’ve paid down 20% or more of your mortgage.

Let's use an example and say the appraised value of your home is $200,000, and your current mortgage loan balance is $150,000. With a loan-to-value ratio limit of 80%, the HELOC line maximum would be $10,000.

This HELOC calculator will help clarify the home equity line of credit amount you may qualify for.

What Can I Spend My HELOC On?

You can use your HELOC funds however you like.

  • Make a big purchase, like a vehicle, a trip, or an additional property
  • Renovate or improve your home
  • Consolidate debt or pay off a loan that has a higher interest rate
  • Fund your education or finance a new business venture
  • Use your HELOC as an emergency fund

As you talk to your Renasant lending professional about your HELOC, tell them how you plan to spend the funds, and they can help you assess the risks and benefits of using a HELOC to accomplish your intended goal.

Tax Advantages of HELOCs

Some of the interest on your HELOC may be tax deductible, depending on how you spend your funds. There are a few main conditions that allow your HELOC interest to be tax deductible:

  • The HELOC must be taken out on your primary or secondary home. If a HELOC is taken out on a third property, the interest will not be tax deductible.
  • The HELOC funds must be used to buy, build or substantially improve the same home it is secured with. Spending your HELOC funds on a vacation, a vehicle, or to pay off another loan will disqualify the interest tax deduction. Also, if you take out a HELOC on one house and use the funds to buy, build, or improve a different house, the HELOC interest won’t be tax deductible.
  • You may only deduct interest on $750,000 of qualified residence loans. The limit is $375,000 for a married taxpayer filing a separate return.

Tax scenarios vary widely and drastically. Be sure to consult your tax advisor before taking out a HELOC loan to see how the HELOC will affect your taxes.

Are you helping your home equity work for you?

Your home is likely your largest asset. Isn’t it time you tapped into your equity and used that wealth to fund your next project or purchase, your next venture or adventure?

At Renasant, we understand lending. Our team will work to understand your needs and goals to craft a HELOC that fits your needs. They’ll walk you through every step of the way.

Find a branch near you, and start leveraging the value you’ve put into your home, or call to set up an appointment at (877) 367-5371.

*You should consult a tax advisor for further information regarding the tax deductibility of interest and charges.