Understanding the HELOC Loan Options
Even if you sometimes find it difficult to remember the meaning of some of the acronyms used in the world of banking, HELOC is one of those terms that might payoff to remember. These letters stand for Home Equity Line of Credit and are usually pronounced as if written “He Lock”. The equity represented by the “E” of the HELOC refers to the difference in value between the market price your house could realize and the amount of money you still owe on the house purchase. The bank takes this property valuation as collateral against the HELOC loan and allows the borrower to draw out funds for a period that usually lasts from five to ten years. The HELOC repayment period is usually from between ten to twenty five years.
Is the HELOC an equity loan or a credit card?
The fact that property serves as security for the HELOC makes it similar in this respect to a regular home equity loan or second mortgage but there is a key difference: with the standard equity loan the bank gives you the whole loan in a single payment while with a HELOC it effectively provides you with a credit card that you can spend up to the value of your equity over the agreed time period. However, in contrast to a credit card the debt is secured against your property.
Another key difference between the HELOC and the equity loan is that the former carries a variable interest rate. Usually, banks link the HELOC rate to an index such as the prime interest rate and they add on an additional percentage to cover their risks and required profit margins.
In some cases, the borrower receives a special credit card for the HELOC loan or they can draw the money out using a check book or debit card. The amount available declines each time you use this credit line but it increases again with your repayments up to the full amount of the HELOC.
What do I have to pay and how do I pay it?
Similar to other types of loans you need to pay back the amount of the loan plus interest. The interest levels are calculated daily because the balance owed changes regularly according to your spending.
The repayment terms vary between the different banks. In some cases, a monthly payment consisting of the interest only is made, but you also have the option to make a larger payment as long as this is going to be less than the total amount still outstanding on the HELOC. In other cases, when the period of the HELOC expires, the whole amount becomes due to the bank and the borrower must refinance to meet this payment.
How could a HELOC help me?
As in all your other major financial deals you need to carefully access anticipated benefits against potential costs and risks. The nature of the project or event you need to finance is also an important determinant of whether it is logical to prefer a HELOC over other financing options.
Pros
- HELOCS are useful for meeting major but intermittent demands on your finances, for example buying a new car, university fees, home improvements and wedding expenses.
- They can help you consolidate debt and ease repayment burdens
- Current low prime rates make HELOCs a cheap financing option
- HELOC repayments may qualify you for income tax deductions.
