Let’s get personal about HELOCs and PLOC
Presented by Anamika Madan
In this issue of Let’s get personal we tackle HELOC (Home Equity Lines of Credit) and PLOC (Personal Lines of Credit).
Home Equity Lines of Credit
First let’s talk basics, if you own a home one of the biggest perks is the ability to build equity over time. With a HELOC, you're borrowing against the available equity in your home and the house is used as collateral for the line of credit. As you repay your outstanding balance, the amount of available credit is replenished – much like a credit card.
Some of the advantages to having access to a HELOC can include the following:
- Access cash for renovations, large purchases, or alternative debt repayment.
- Home equity loans and lines of credit are secured against the value of your home equity, so lenders may be willing to offer rates that are lower than they do for most other types of personal loans.
- A home equity loan comes as a lump sum of cash.
- A home equity line of credit (HELOC) is a revolving source of funds, much like a credit card, that you can access as you choose for the life of the line of credit.
Most banks offer a number of different ways to access those funds, whether it’s through an online transfer, writing a check, or using a credit card connected to your account.
Most home equity credit lines have two phases. First is a draw period, often 10 years, during which you can access your available credit as you choose. Typically, HELOC contracts only require small, interest-only payments during the draw period, though you may have the option to pay extra and have it go toward the principal.
After the draw period ends, you can sometimes ask for an extension. Otherwise, the loan enters the second phase, repayment. From here on out, you can no longer access additional funds and you make regular principal-plus-interest payments until the balance disappears. During the repayment period, you must repay all the money you’ve borrowed, plus interest at a contracted rate.
HELOCs have many attributes that make them different from a standard credit line and also offer advantages. However, the interest-only payments in the draw period mean payments in the repayment period can almost double. For example, payments on an $80,000 HELOC with a 7% annual percentage rate (APR) would cost around $470 a month during the first 10 years when only interest payments are required. That jumps to around $720 a month when the repayment period kicks in.
Tapping your equity for home renovation projects has another advantage. The Internal Revenue Service (IRS) lets you write off some of the interest on home equity credit as long as you itemize deductions.
Personal Lines of Credit
Now let’s switch our focus from your home and get more personal.
A personal line of credit (sometimes referred to as a PLOC) is a set amount of money from which you can borrow (up to the limit) for a given period of time, referred to as your draw period. Similar to a credit card, you draw the amount you need from the available balance, and you only pay interest on that amount. Sound familiar? Now, let’s get go a little deeper.
Personal lines of credit are unsecured revolving accounts with variable interest rates. It can be a viable option to help manage your cash flow, especially if you have an irregular income or are faced with an unexpected expense.
PLOCs generally have lower interest rates than credit cards, so they’re typically cheaper for big cash advances. However, because PLOCs are unsecured, they’re best for consumers with a strong credit history (say, 680-plus on the FICO scale). The lender is taking your word that you will pay back what you borrow with this type of LOC.
Every draw will have to be repaid with interest, which is variable — meaning your interest rate will rise and fall based on market fluctuations.
It’s also important to note that most PLOCs have an expiration date.
You will have to pay off any remaining balance during the repayment period. However, different lenders may have different terms for repayment. The various types of repayment may include the following:
- Draw and repayment periods: This is the most common type of repayment used for a PLOC as described above. Typically, monthly payments are required during the repayment period.
- Balloon payments: This type of repayment requires that the full balance is paid at the end of the draw period.
- Demand line of credit: While not very common, some lenders may set up a PLOC as a demand line of credit. This means the lender has the right to ask for full repayment at any time.
When setting up your personal line of credit, ensure you understand your lender’s repayment terms. Be sure to make a repayment plan.
In short, HELOCs and PLOCs give you quick access to funds, have competitive rates compared to credit cards, and you only pay for the draws you take.
We recommend all our clients to have either a HELOC or PLOC available to access in case of emergency. It doesn’t hurt to have a back up plan if something un expected occurs, and we all know how unpredictable life can be sometimes.
Want to know more? Reach out to your Financial Planner, or if you’re new to ELEMENT let’s schedule a time to talk.