A home equity line of credit, or HELOC, is a loan in which the lender agrees to lend a maximum amount within an agreed period of time, and the equity in the borrower's home is used as collateral. This is different than a typical home equity loan in that with a HELOC, the entire sum is not given to the borrower up front and instead, they borrow sums that are no greater than the credit limit, similar to a credit card.
The Facts
The credit limit on your home equity line is decided by the lender, who will generally calculate the limit by taking a large percentage of your home's appraised value, and subtracting from that the balance owed on your existing mortgage. For example, if your home is appraised at $100,000 and the existing balance on your mortgage is $40,000, then your approved line of credit would usually be somewhere around $35,000. You should also know that the lender will likely adjust your line of credit after examining your income, debt and other financial information to determine your ability to repay the loan.
Types
While a home equity line of credit is right for some people, in some cases a traditional second mortgage loan may better suit a person's specific needs. Unlike a HELOC, a second mortgage loan can provide you with a fixed amount of money, repayable over a fixed period. When deciding which type of loan is right for you, you should carefully examine the annual percentage rate (APR) along with other charges. It is important to note that the APR on a HELOC and the APR of a second mortgage loan are determined differently and thus this should not be your only means of determining which loan is right for you.
Features
Most home equity plans will set a minimum monthly payment that the borrower must make, which will also include accrued interest. The borrower always has the option to pay more than the minimum required payment if they so desire. Many plans also offer a payment of interest only, which means that over the life of the plan your payments go only towards the accumulating interest and once the plan has ended you still owe the principal of the loan.
Identification
Unlike most conventional loans, the interest rate on a home equity line of credit is variable. This means that the interest rate can change over time. The interest rate will generally be based on the Prime Lending Rate. HELOC loans have seen a recent rise in popularity due in large part to the interest paid generally being tax deductible. Another benefit of a HELOC loan is that the borrower is often offered a more flexible repayment plan and has a greater say in the payment schedule.
Considerations
When shopping for a home equity line it is very important that you read all of the information carefully and look for the plan that best meets your specific needs. You will likely find that the cost considerations of setting up a HELOC are similar to the considerations you must take when buying a home. For example, you will generally have to pay an application fee, a home appraisal fee, fees for attorneys and closing costs. Other fees may also arise during the plan period.
Member Comments