4 ways a HELOC can save you money

HELOCs are a popular choice for homeowners looking for a flexible, low-rate borrowing option. A HELOC is an open line of credit secured against the equity in your home. This line of credit can be accessed as needed for a set period of time, known as the draw period, which usually lasts around 10 to 15 years. During the draw period, you'll make interest-only payments calculated on the balance of the funds you've withdrawn. When the draw period ends, the repayment period begins. At that time, your monthly payment will include both principal and interest amounts.

If you're weighing the pros and cons of a HELOC, here are four ways that this type of financing can save you money.

1. Lower interest rates

HELOCs use the equity in your home as collateral, which typically translates into lower interest rates compared to unsecured borrowing options, like personal loans or credit cards. Over time, when you borrow from the HELOC to fund large expenses, the lower interest rates can result in significant savings. For example, if you estimate that you'll need $10,000 to build a backyard deck for your home, you might consider withdrawing funds from a HELOC with a variable interest rate that is currently 7.5%. Or you may want to use a personal loan with an interest rate of 10%. If you pay off the HELOC over 10 years, and the interest rate remains at 7.5%, you can expect to pay $4,162 in interest, compared to $5,858 for the personal loan. However, it's important to remember the HELOC's variable interest rate can shift, which could move your monthly payment up or down throughout the repayment period.

2. Debt consolidation

You can leverage the equity in your home with a HELOC to lower the cost of your outstanding debt. During the HELOC's draw period, you can use the line of credit to pay off higher-rate credit cards and personal loans. Going forward, you'll only have one monthly payment to manage. For an idea of just how much you can save, try inputting your current loan and credit card balances into a debt consolidation calculator.

3. Potential tax benefits

Currently, the IRS allows taxpayers to deduct a portion of the interest paid on a HELOC when the funds are used to buy, build or make substantial improvements to their primary or secondary home. HELOC interest is tax- deductible when you itemize deductions on Schedule A of the Form 1040 rather than taking the standard deduction. If you itemize deductions, interest on HELOC balances up to $750,000 may be deducted for married couples and $375,000 for single filers, when the funds are used for qualifying expenses. However, you should always consult with your tax advisor or accountant to ensure you are receiving the maximum tax benefit.

4. Flexibility

With a HELOC, you'll have access to an open line of credit, but you'll only use it to borrow the amount you need, when you need it. HELOCs can be used for a number of purposes, not just home renovations. You can tap into your line to pay for an upcoming wedding or vacation, to fund college expenses or even to manage your personal cash flow when making large purchases, such as holiday gifts.

To further illustrate the benefit of a HELOC, suppose you build the deck in the example above, but in the end, it only costs $8,000, instead of original $10,000 estimate. With a personal loan, you've already borrowed the entire $10,000 and must pay interest on that amount. But when using a HELOC, you only pay interest on the $8,000 amount withdrawn from the line. If the deck costs are higher, say $12,000, the HELOC's flexibility also saves you time and money, because you won't need to apply for another loan to fund the additional expense. You'll also avoid the need to use a higher-rate credit card to cover the added $2,000 payment.

There's also flexibility when repaying a HELOC. During the draw period, you're only required to make interest-only payments, but you're free to pay off the principal balance as well, if you choose. A personal loan does not offer this payment option, as you will need to start repaying the principal amount immediately.

See what you can save: Get your HELOC rate

If you're ready to take a deeper dive into the application process and learn more about the benefits of a HELOC, you only need to answer a few simple questions to receive a personalized offer, including your current interest rate.

Find out if Citizens FastLine® can help you get a jump start on your next big financial goal.

Explore Citizens Fastline