Home equity lines of credit (HELOCs) have grown in popularity over the last few years, as more people look for cheaper or more accessible financing alternatives to conventional bank loans. Unfortunately, however, misinformation and misunderstandings surrounding HELOCs have also increased.
If you’re thinking of taking advantage of a HELOC, then here are 10 myths that you want to be aware of:
Myth: You can only use a HELOC to pay for home improvements.
Fact: You can use a HELOC to pay for pretty much anything, such as a vacation, restoring a car (get the facts on how much does it cost to restore a car here ), paying for school tuition, consolidating credit card debt, and the list goes on.
Myth: A HELOC and a home equity loan are the same thing.
Fact: A HELOC is a line of credit that you draw down as needed. You do not pay interest on the unused portion. A home equity loan is a lump sum loan. You pay interest on the full outstanding balance.
Myth: A HELOC is basically a second mortgage.
Fact: As noted above, a HELOC is a line of credit. It’s not a mortgage (unless the funds are used to mortgage a property).
Myth: Getting a HELOC will damage your credit score.
Fact: Getting a HELOC won’t damage your credit score. However, just like any other type of loan or financing, failing to make timely payments will have a negative impact — and may even lead to the HELOC being cancelled.
Myth: You can’t get a HELOC if you just moved into your home.
Fact: The length of time you’ve lived in your home is irrelevant. A HELOC is based on the equity in your home (up to 85%).
Myth: When financing a car, it always makes sense to use a HELOC instead of other kinds of financing.
Fact: Many years ago, this was usually the case. However, in the last several years vehicle financing costs have fallen. So, while it might make sense to use a HELOC to fund a new or used car purchase, it’s still wise to shop around and see if a better deal is available.
Myth: Your HELOC is guaranteed.
Fact: Some financial institutions can (and will) reduce or even cancel your HELOC if you get into financial trouble, or if the value of your home drops considerably below its appraised value.
Myth: You can pay off your HELOC by making the minimum monthly payments.
Fact: Unlike outstanding credit card balances, the minimum monthly payment on a HELOC only covers interest — not principal. Once the draw period ends (i.e. the lifespan of a HELOC), the full principal is due.
Myth: HELOCs allow you to access 100% of the available equity in your home.
Fact: Per FTC rules, lenders can only provide up to 85% of the total available equity in a home.
Myth: You can no longer deduct the interest paid on a HELOC.
Fact: There is some truth in this — but it’s not the full story. Per the the Tax Cuts and Jobs Act of 2017, interest paid on HELOCs are no longer automatically deductible (this may change after 2026). However, the IRS has said that taxpayers who use a HELOC to buy, build, or substantially improve their home may be allowed certain tax deductions. For more information on, check out this IRS bulletin.