Home Equity Line Of Credit – a cross between a loan and a credit card!
By Sadiya Anjum
So you watch your neighbor show off his new car every morning and you wonder where he got that money considering his job does not pay as much as yours, he did not inherit from a relative – did he borrow that money? It is probably because of a HELOC! Home Equity Line of Credit or HELOC is basically converting the equity on your home to cash.
HELOC is relatively simple to understand. A HELOC is when the lender agrees to loan a maximum amount in a given period of time and the collateral for this loan is the equity on your home. It is a fancy form of a credit card and works more or less like it. Usually the lender does not hand you a check but sets a credit limit for a given period of time. You can just use a check book set against your HELOC and spend up to the maximum limit within the specified period of time.
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Unlike standard mortgages, HELOC definitely has some advantages. Perhaps the safest is that the interest paid for a HELOC is generally tax deductible. The other good part is that you are obligated to pay only the amount you use and the interest on it. But the happiest advantage is that your monthly payment only includes the interest. So till your draw period comes to an end, you can spend large amounts of money depending on your equity and pay only the interest. This gives you tremendous power to spend a huge sum of money at a very nominal rate.
But stand cautioned against how you spend! You have to return the principal amount at the end. This can be done either by paying a HELOC balloon payment or paying based on a loan amortization schedule. So, exhausting your credit limit (possibly a large amount!) and not thinking of how to return the principal amount would be really foolish as it may result in foreclosure.
In addition, the term that is usually fixed for a HELOC is generally lesser than a standard mortgage. It may range anywhere between 5 and 25 years. Perhaps one of the most marked differences between a standard mortgage and a HELOC is in its interest rate. For a HELOC the interest rate is usually gauged against an index – like a prime rate. A prime rate is subject to change and almost definitely it will change. So you will have to bear with the fluctuations that come with it.
A HELOC can be used to practically buy or invest in anything. Though most people get a HELOC to finance the second mortgage on their home, it can also be employed to obtain the first one. In this case, the lender assumes that the house is already yours and based on its value gives you a loan. If you know how to spend wisely, you can splurge on a boat or a vacation. But if you are the safe sort of person, then its best if you save the HELOC for emergencies. When the money is running out, a HELOC can save you. How ever you choose to spend this money now, remember you will have to repay it later. A HELOC may seem like you are on a free vacation but nothing in business is really free!
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