3 Smart Reasons to Get a Home Equity Credit Line — and 2 Reasons Not To

Thanks to the popular website Zillow, it’s easy to find a rough estimate of what your home is worth with the click of a mouse. Homeowners can join Zillow and every month or so, they will get an email showing a valuation of their homes. Many homeowners in Utah and Idaho are shocked to see the value of their homes reaching higher and higher levels, month after month.

An increase in equity is a great thing. The price you paid for the home is fixed. The amount of your mortgage principle is fixed. But the value of your home goes up. 

Once the equity in your home exceeds 20 percent of its value, you’ll log two big wins: First, you will no longer be required to pay private mortgage insurance. Second, you may now qualify for a home equity line of credit, also known as a HECL or HELOC.

The more equity you have in your home, the more you can borrow. But just because you can, doesn’t mean you should.

Here are some situations when it’s a good idea to tap into your home equity — and when it’s better to look for other options.

Few of us have the funds on hand for a major repair like replacing a roof or furnace. Rather than pay for it using a high interest rate credit card, you can save big by using your HECL. At the same time, making these types of investments will allow you to maintain value of your home.

Your housing needs change over time, but if you love your home, you may not want to move; a remodel might be a better solution. Make sure the remodel is the type that will maintain or increase the value of your home. Hint: Not everyone would enjoy a customized bowling alley in the basement.

In an ideal world, you would have an emergency fund equal to three to six months of living expenses. But emergencies happen to people regardless of whether they have emergency savings. If you had to choose between paying for a major medical expense with a credit card — which could add 20 percent to your cost due to interest rates — or with a home equity credit line that costs a third of that, the choice is a no-brainer.

But a home equity credit line isn’t always a good idea. Here are two reasons to stay away:

Prior to the Tax Cut and Jobs Act, financial advisors would tell you there were circumstances where you could take a tax deduction on the interest you paid on a home equity credit line. Under the new tax laws, which took effect with the 2018 tax year, that is no longer true in most cases.

The exception is that interest may be deductible for buying, building, or substantially improving the taxpayer's home. Far fewer people are expected to itemize tax deductions now because the standard deduction is being doubled and will typically exceed the amount most people would claim as deductions.

A huge benefit of home ownership is to become mortgage-free to make retirement more comfortable. Most people earn less in retirement, so it is nice to not have a house payment during that time.

And, the sooner you pay off your mortgage, the sooner you can use those funds to increase retirement savings. Using a HECL to take vacations you can’t pay for from income or buying nicer cars than you can pay for otherwise, is going to delay the day you own your home free and clear. 

A Zions Bank home equity credit line is currently being offered with an introductory APR of prime minus 2.03% for 6 months and 5.59% - 7.09% variable APR thereafter[cite::8560::cite]. Check out the Zions Bank website or visit a Zions Bank branch near you for details.

Equal Housing Lender. NMLS #467014.

Don Milne is Financial Literacy Manager for Zions Bank.