We live in a world where unforeseen circumstances occur without our control. With these circumstances comes the need for more liquidity to take care of these scenarios, especially in the case of our homes. One such savior for homeowners is the Home Equity Line of Credit, also known as HELOC.
HELOCs are a form of a second mortgage where you draw on the equity that your home has built over time. With this line of credit, you home stands as collateral and, as you repay your balance, the available amount of credit is restored. This gives you more room for taking on another line of credit. As a homeowner your credit score must be at least 620 to qualify for a HELOC.
Essentially, HELOCs run like a credit card. The bank gives you a limit of up to 10 years and this period of time guarantees the homeowner the ability to withdraw as much money as necessary. This money may be used for the circumstances homeowners see fit, whether that is fixing up a current residence or possibly taking care of an emergency.
Types of Home Equity Lines of Credit
There are two known forms of HELOCs:
- The type that comes with a draw period that accumulates interest.
- The type that allows you to pay the principal and interest over the draw period.
The Risks Involved
When engaging in a Home Equity Line of Credit, your home must act as a collateral tool before the credit is granted.
Also, if the value of your home decreases upon obtaining a HELOC, you may end up owing the bank more than what the home is currently worth.
Also, the HELOCs are usually connected to a standard interest rate. As this figure increases or decreases, so does its application to the HELOC rate.
The inability to pay back the loan over the allotted period of time may also result in legal seizure of property by the bank. Remember, to secure the HELOC your home had to be used as collateral.
Benefits of HELOC
One of the benefits of a Home Equity Line of Credit is that it gives one access to fast cash. This is very helpful in times where an incident or scenario must be taken care of at a particular point. Some of the reasons behind why people take on HELOCs are to pay off student loans, do some home improvements, or cater to other types of varied responsibilities.
When the line of credit expires, the homeowner moves into a reimbursement period that can last as long as 20 years. This gives the borrower adequate time to repay the loan at their own convenience.
Why Is This Important?
If the interest rate on a HELOC is 6% and the payment is tax-deductible while credit card debt interest rate is 27% with a non-tax-deductible payment, then you save more cash on a HELOC compared to a credit card loan.
Take a look around and compare the figures from at least three banks, including your current lender, to ensure that you get the best deal. Just know that, like any other form of debt, you have to make sure you can afford it. Just because you have the equity does not mean you have to take it. Know, though, that HELOCs can be used as a good move to remove some bad debts or make necessary improvements to your properties. If you would like to learn more about these loans, I would check out this book The Home Mortgage Book by Dale Mayer.
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