Home equity line of credit (HELOC) is a line of credit which is specialized for homeowners that are looking to receiving financing. The equity of the homeowner’s property is the collateral which is used on the home equity line of credit. The home equity is determined by taking the home’s value and deducting the remaining mortgage debt and other outstanding liens.
Home equity line of credits may often referred to as home equity loans but there is a difference between the two. Basically, a home equity loan provides the loan amount upfront and repayment of the loan starts right away. However, with a home equity line of credit you receive funds as you need them and repay them accordingly. So, a home equity line of credit works more like a credit card, while a home equity loan works like a standard loan. The home equity line of credit will allow the homeowner to utilize as little or much of the line of credit as they want. The funds can keep being used and repaid for however long the borrower wishes.
The Benefits of a Home Equity Line of Credit
The typical benefits featured with credit cards are also available with home equity line of credits. That being, you will have funds available whenever you need them but you do not have to use them if you do not wish to. This means that you will not have to make interest payments if you are not borrowing any money. Another major benefit that makes the home equity line of credit very appealing is that the interest payments may be tax deductible.
The Downfalls of a Home Equity Line of Credit
The major downfall of a home equity line of credit is what happens if the line of credit is defaulted. Failure to make payments on the home equity line of credit could default the loan and lead to foreclosure of your home. Usually banks now require the homeowner to leave a set amount of home equity after issuing an amount of home equity to the line of credit. This means that not the full equity of the home will be available for the line of credit. Another possible downfall to the home equity line of credit is that it features a variable interest rate.
What Else to Know About the Home Equity Line of Credit
The other main feature of a home equity line of credit that you should be aware of is the draw period. The draw period is the set amount of time which is determined when the line of credit is first issued. When this period of time comes to an end, the borrower must pay off the home equity line of credit in completion. After this is done, the line of credit will be closed. If you wish to pay off the line of credit early then you may do so and close the line of credit without having to worry about any prepayment penalties.
You should be sure that you are capable to make the payments on time. If you are not 100% sure that you are capable to do so then it is recommended that you do not use the line of credit for financing. You do not want to risk foreclosing your home as it could put you in a much more devastating financial situation. The home equity line of credit is a great choice of financing though. This type of financing features a low interest rate and reasonable repayment terms. It is definitely a great alternative to using a credit card.
If you have a considerable amount of home equity then you may want to obtain a home equity line of credit. You do not have to use the maximum available. If you wish to limit yourself then you could still use the home equity line of credit as an open line of credit with a decent amount of funds on hand if you need to use them. This is definitely a very beneficial type of credit to have and any homeowner should consider applying for it. In closing, a home equity line of credit is extremely useful for any homeowner and it is a worthwhile option to consider instead of other types of loans and financing.