Evaluating Home Equity Line of Credit (HELOC)

I recently shopped around to get a home equity line of credit (HELOC) against my home.

What is a HELOC?

A HELOC is a revolving line of credit that is using your house as collateral. Unlike a home equity loan, you don’t have to use the entire amount of credit available. You can just borrow as needed, like your credit card. You must pay it off after the specific period or at the event of selling your house.

Why did I need it?

I wanted to replace my emergency fund that was in CDs. Having a HELOC helped me to move the money that would have been into CDs into higher yielding bond funds in taxable accounts.

I chose Bank of America as a lender

After contacting several lenders, I closed with Bank of America. Here’s the reason:

  • No fee - BoA didn’t charge me any fees at closing. They don’t have fees for maintaining the account either. Some lenders said they will charge about $500 as appraisal and closing cost. It made no sense to me that I pay fees to replace my previous emergency fund in Ally Bank’s CDs.

  • No minimal draw amount - BoA doesn’t require me to borrow at account opening. As I have no plan to use the account for a while, BoA fitted to my situation better than other lenders who had minimum amount.

  • Account consolidation - I use BoA as primary banking, so accessing the HELOC account from BoA mobile app and web site is convenient.

  • Disclosure of terms - The way BoA disclose the terms and work with me was very professional. Important info such as APR and discount option was posted online. Some lenders I contacted didn’t have any information I could find online, instead they worked with me over the phone and email. There was no fine print that I could review during shopping.

Here’s additional information on the terms

  • APR:

    • Introductory rate: 3.99% for first 12 months

    • After that, 6.5% = U.S. Prime Rate 5.5% + bank’s margin 1.25% - auto payment discount 0.25%.

      • BoA provide additional discount if the borrower decides to draw money at account opening. 0.10% for each $10,000 they draw, up to 1.00%.

  • Period: 10 years for draw, 20 years for repayment. If I have no balance after 10 years, the account will be closed.

  • Early closing fee: $450 if I close the account within 3 years.

What about tax deduction?

Unfortunately, under the Tax Cuts and Jobs Act of 2017, interest from new HELOC account is no longer tax-deductible, unless the HELOC was used to improving primary or secondary home. Read more from this article from Charles Schwab.

Conclusion

A HELOC is a very useful tool for paying a big amount of money for life events such as home improvement, down payment for your 2nd house, or any kind of financial emergency. Although tax deductibility is low, it is something my readers should consider.