Home Equity Line Of Credit
A HELOC (Home Equity Line Of Credit) allows you to borrow money against the equity built in your home, for various reason, such as doing renovations, taking a vacation etc. It is not the same as a home equity loan. With HELOC you are not advanced the entire sum up front, you will use a credit line to borrow sums no higher than the amount of the approved credit line. You could compare it to the way a credit card would work.
You will be approved a credit limit that you can borrow and you pay back only what you use plus interest.
With HELOC you will have a minimum monthly payment, that translates into interest only payment a lot of the times and after you paid the minimum it is up to you how much extra you add on. It is always prudent to pay more then just the minimum monthly payment but if for some reason you are not able to you will not be penalized.
The interest rate on a HELOC is variable based on prime rate, meaning your interest rate will fluctuate. If you intend to use HELOC you should know that all lenders calculate their margin the same way, meaning, the margin is the difference between the prime rate and the interest rate the borrower will actually pay.
HELOC loans are popular and used for investment a lot of the time.
Interest paid is most of the time deductible under income tax laws.
It is a good tax reducing or saving strategy.
Adding to the popularity of HELOCs is the flexibility of the loan setup in terms of borrowing terms and repaying responsibility. These are mainly set up to suit the borrower’s needs. On top of that a HELOC loan is looked upon more favorably then a second mortgage”, which can reflect on the borrower as adding on to his or her debt load.
Keep in mind that lenders generally require you, the borrower to maintain a certain “safe” amount of equity in your home in order to circumvent foreclosure.
A home equity loan is a type of loan which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, or your children’s education. A home equity loan creates a lien against the borrower’s house, and reduces the overall home equity.
Home equity loans are most commonly second position liens (second mortgage), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value ratios.
These types of loans are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages.
There is a big difference between a Home Equity Loan and a Home Equity Line Of Credit in that a HELOC is a revolving line of credit with an adjustable interest rate while a Home Equity Loan is a onetime lump sum usually with a fixed interest rate.