Loan Officer Practice Exam

A home equity line of credit tends to provide borrowers with all the following benefits EXCEPT:

1. A) a fixed interest rate

2. B) borrowing the amount of funds needed when needed

3. C) flexible payoff terms

4. D) a potential interest rate tax deduction

The correct answer is: A) a fixed interest rate

A home equity line of credit (HELOC) typically does not offer a fixed interest rate, which is why this option stands out as an exception among the benefits. Instead, most HELOCs come with variable interest rates that can fluctuate based on market conditions. This means that while borrowers might enjoy lower initial rates, they could face rising costs if interest rates increase over time. In contrast, borrowing the amount of funds needed when needed is a significant advantage of a HELOC. Borrowers can access funds up to their credit limit and only pay interest on the amount they actually draw, providing flexibility in managing their finances. Additionally, flexible payoff terms allow borrowers to repay their draws over time according to their financial situation, which can vary greatly month-to-month. Lastly, the potential for an interest rate tax deduction can benefit borrowers as interest paid on a HELOC might be tax-deductible, further enhancing its attractiveness compared to other borrowing options. Together, these aspects illustrate why a fixed interest rate is not characteristic of HELOCs, making it the option that does not align with the typical benefits provided by this type of credit.