HELOC is the abbreviation for Home Equity Line of Credit.
This refers to a loan in which the lender agrees to lend a maximum amount
within an agreed period. Since the borrower is not advanced the entire sum up
front, but uses the line of credit to borrow sums totaling no more than the
amount, it differs from standard loans.
In many ways, a Home Equity Line of Credit is similar to a
credit card. You are assigned a specified credit limit that you may borrow up
to at closing.
Whenever you feel the need, a draw period usually lasts
anywhere from 5 to 25 years and
allows you to borrow HELOC funds; you're only required to pay back the amount
you use plus interest.
What's nice about the home equity line of credit is that
often, until the end of the draw period, you are only required to pay the
interest.
At the end of the draw period, you'll have to do one of the
following:
- Based
on a loan amortization schedule you have to pay.
- Pay
back the full principal HELOC amount borrowed
- Pay a
Home Equity Line of Credit balloon payment
There are several different types of home equity lines of
credit. These differences based on the interest rate charged the homeowner.
HELOC or home equity line of credit may be beneficial if you
want to consolidate your debt. This is because compared to credit cards and
other unsecured credit facilities, the interest rate in a home equity line of
credit is somewhat smaller. Another benefit of this means of taking out money
is that consumer credits interests are tax deductible.
Sometimes a home equity line of credit will have variable
interest rates. With variable interest rates, the homeowner cannot know for
sure from month to month what the interest payment will be. The interest rate
on the loan will vary to the same degree as the interest rate set by the
Federal Reserve Board.
While you are considering the flexibility of a credit line,
if you need a lump sum fund, it is recommendable that you may consider taking
out a Home Equity Loan instead, since in a home equity loan, you pay the
interest and part of the principal debt regularly.
This is contrary to the variable interest rate that applies
in a home equity line of credit. Additionally, in a home equity credit line,
your payments balloons at the end when you need to pay the principal amount of
debt.
This makes it quite hard, and if you are not ready for such
balloon payment, the risk of loosing your house is intrinsic in this case.
This is the reason why financial experts recommend that you
may need to scrutinize yourself a bit before you sign any contract that puts
your house as collateral,.
- Do you
need fund periodically? Ask about Home Equity Line of Credit.
- Will
you need the money lump sum? Ask about Home Equity Loan.
In some cases, the home equity line of credit offers a low
introductory interest rate. These rates sound attractive, but they conceal the
fact that the homeowner will later be asked to pay a significantly higher rate.
In order to learn exactly what the payments could be at a
much later date, the homeowner needs to read the loan materials carefully.
Some offers of a home equity line of credit come with a
large one-time fee. Other differences in the home equity line of credit often
concern the costs of the application process.
Other offers for a home equity line of credit might avoid
mention of such a fee but then add continuing costs. It is also possible that a
home equity line of credit could tack on a balloon payment.
Once the period of the offer of credit has ended, this is a
sizable payment that is demanded from the homeowner. Alternate offers for a
home equity line of credit could avoid requesting a high balloon payment but
instead request much higher monthly payments.
The homeowner can either takeout a second mortgage or borrow
from credit lines that do not use the home as collateral, if he does not want
to get a home equity line of credit.
So as to borrow from credit lines that do not use the home
as collateral the homeowner needs to seek out those who value what he has to
offer. Perhaps he owns land in a distant region where the land value is going
up.
In a different type of line of credit, this could possibly
be used as collateral. A small business owner who did not want to risk his home
for a home equity line of credit might need to think about using the business
as collateral.
Benefits of a Home Equity Line of Credit
By means of your home equity line of credit for home
improvements, consolidating your high-interest debts, or keeping a "rainy
day" fund, is a better financial alternative than using your credit cards.
Here are the top four home equity line of credit benefits:
With your credit cards, you get a lower interest rate. That
means you pay less interest over the life of the loan.
You get tax advantages that are not available with credit
cards. With a home equity line of credit, the interest is usually
tax-deductible. Interest on credit cards is not tax-deductible.
You get flexibility in your payment options. Lenders like
Quicken Loans offer interest-only options to help make your payments more
flexible.
By means of an interest-only home equity line of credit, you
have the option to pay only the interest for a pre-determined amount of time or
pay interest plus as much or as little principal as you want.
To determine your actual credit limit, the lender will also
consider your ability to repay, by looking at your income, debts, and other
financial obligations as well as your credit history.
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