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HELOC – Home Equity Line of Credit

A home equity line of credit, similar to a home equity loan, can be dangerous for those who don’t know the details before agreeing to the terms.

A HELOC, or a home equity line of credit, is set up to have a maximum draw limit, rather than just a set dollar amount in the form of a lump sum (as a home equity loan does). Similar to a home equity loan, a home equity line of credit uses your home as security. This line of credit is set up to a certain amount decided between you and your lender.

In general, a HELOC offers you 80 percent of the market value of your home minus any fees currently owed upon it. You can draw out any amount (all or some portion of the total) within amount of time the lender has set. A HELOC, in simple terms, is a recommended alternative to a home equity loan for those with ongoing projects for which they can’t estimate the total amount of money they will need.

One appealing aspect of a HELOC is that it’s available to people with bad credit. In fact, people can even use this type of loan to improve credit, as long as payments are made on time. Since the borrowers use their homes as security for the loan, and the line of credit given out is usually less than the value of the home, lenders have little risk offering these types of loans to everybody.

Second Mortgages: The Home Equity Loan vs. HELOC

Say you are in desperate need of cash, have projects to fund, mouths to feed, bills to pay. You decide to drop by the bank and get a loan. When offering your home as collateral, you have a choice between getting a home equity loan or a HELOC, a home equity line.

A HELOC is a better choice when you need the option to choose whether or not you need the cash at a given time. When you need it, you can borrow it. When you don’t, you don’t have to take out any cash, nor pay the interest rates associated with borrowed cash you don’t need. For those in need, a HELOC is a welcome alternative to many other loan choices because you won’t have a lot of money just sitting around that you have to pay interest on.

The Pros of a HELOC

One of the biggest advantages of a HELOC loan is the safety it offers borrowers. With a HELOC, you can effectively budget the amount you borrow within the limits of what you can to repay. Similarly, because the money isn’t just dumped into your pocket all at once, you are less likely to waste it and end up in trouble. Instead, you can draw it out, as you need it, preventing you from splurging with it or having to pay interest on the unused money.

A HELOC generally has low settlement cost rates. For example, a $150,000 line of credit would cost around $1000, compared to the $2500-5000 cost for a home equity loan of the same amount that gives you all of the money up front. While other fees associated with a HELOC tend to be more expensive, overall, a HELOC doesn’t cost that much more than a standard home equity loan.

The Cons of a HELOC

The main disadvantage to a HELOC is that it puts you in danger of losing your house. If you can’t make the payments on time, your lender will take ownership of your home.

Another disadvantage of a HELOC loan is the fact that people may try to go for a long-term repayment. Although the monthly payments can be lowered with long-term repayments, the item purchased with the loan generally doesn’t last as long as the repayment schedule. In essence, you will be paying for something you no longer have.

We hope we have shed a little light on the world of home equity. Just keep in mind that whenever using your home as collateral for getting a loan, be careful, be smart and always take the time to shop around and read the fine print.