3 times a HELOC is better than a credit card
While there are signs inflation is cooling and a recession may be off the table, many Americans still struggle with higher prices and less purchasing power. With interest rates higher than they've been in years and the prospect of imminent relief uncertain, consumers need to do their due diligence before applying for any new forms of credit. With so many options available and rates varied, it pays to understand when one may be better than another.
Homeowners have more alternatives than other borrowers, thanks to the equity they've accumulated in their home. By using a home equity loan or home equity line of credit (HELOC), they can pay for major expenses or emergencies just as they would with a credit card or personal loan. HELOCs, in particular, operate similarly to credit cards in that they provide the borrower with a revolving line of credit to use as they see fit. In fact, there are some scenarios in which a HELOC is better to use than a credit card.
Start by exploring your HELOC options here now to see how much you could borrow.
3 times a HELOC is better than a credit card
Here are three situations when a borrower may be better served using a HELOC instead of a credit card.
When you want a lower interest rate
If you're a borrower with good or excellent credit, you'll likely qualify for a low interest rate. But the lowest rate generally comes with a HELOC, not a credit card.
Credit card interest rates currently hover around the 20% mark, making borrowing with this type of credit prohibitive if you don't intend to pay off the amount you borrow immediately. Meanwhile, HELOC interest rates are around 8% to 10%, depending on your credit history and the lender you use.
While rates on HELOCs have gone up in recent months, they're still significantly lower than what you can expect to get with a credit card. That difference will add up quickly, particularly if you plan to borrow often over an extended period.
Check HELOC rates here now to see what you're eligible for.
When you need it to make home repairs
Arguably the best reason to use a home equity loan or a HELOC is the tax deduction. Specifically, if you use a HELOC to make IRS-eligible home repairs or renovations, you can deduct the interest you paid on it during the tax year in question.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains online. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Since you can't deduct credit card interest from your taxes, HELOCs are generally better to use when it comes time to fix up your home.
When you need a large amount
Anyone with a credit card already knows about the limits most providers allow. Depending on the credit card company and your financial situation, you may only be approved to borrow a few thousand dollars. HELOCs, however, could allow you to borrow tens (if not hundreds) of thousands of dollars. In fact, most borrowers let you use up to 85% of your home equity at the time of your application.
If you have $200,000 of equity in your home, for example, you could potentially withdraw $170,000. Compare that to the top credit limit on one of your credit cards, and it becomes clear that HELOCs are preferable when you need a large amount of money.
The bottom line
Everyone's financial situation and goals are different. What makes sense for one borrower may not be as advantageous for another and vice versa. However, there are some specific times when homeowners may be better served taking out a HELOC instead of applying for a credit card.
When you want to pay a lower interest rate, for example, a HELOC may be the better choice. Similarly, when you know you want to use it for home repairs and renovations, a HELOC is preferable for its favorable interest tax deduction at the end of the year. Finally, when you need a large amount of money (think tens of thousands of dollars or more), a HELOC could be the better route instead of dealing with the limited credit lines many credit card providers offer.
