HELOC or a home equity line of credit, is basically an extension of credit provided by the current loan. This program is a very popular way to gain access to the equity in your home. The way this line of credit works is simple. During the duration of your loan, the lender will promise to give the homebuyer access to the equity/money at the times and the amounts the homeowner chooses. This money can be used at the discretion of the homeowner, whether it be to start a new business venture, pay off bills, send their children to college, or make simple or extravagant home improvements. To access these funds is simple. First, the homeowner can choose to access the funds with a special type of credit card, or secondly, they may choose to use a check. It is that easy!
The draw period or waiting period when the homeowner can access this credit line is typically 5-10 years. During the draw period, the homeowner will only pay the interest on the amount taken. The repayment of the loan can last anywhere from 10-20 years over the course of the loan. At this time of repayment, the money paid by the homeowner will only go towards the principal of the loan. Be careful and read the fine print to your loan because some HELOC loans will require the full balance be repaid at the end of the draw period. However, some HELOC's are like equity loans, or more commonly known as a second mortgage. Another option to the HELOC can be turning it into your first mortgage through a refinance of the property.
What are the benefits in choosing this program over a home equity loan?
HELOC is a good way for homeowners to consolidate the debt they owe. This debt could include anything from school loans, to medical bills, to a simple credit card. The use of HELOC is a wonderful way to save money on interest charges. The interest rates are higher than on a mortgage, but tend to be much lower than a credit card or a personal loan taken from a bank. One thing to keep in mind is the homeowner taking the loan is borrowing money from the home, using the home as collateral. If in fact the loan goes into default, the home can go into foreclosure.
If the homeowner is on a fixed income, a home equity loan may be a better option to choose from. HELOCs may be unpredictable because the monthly payment can fluctuate due to the changing interest rates. The changes in the home market can affect the HELOC loan entirely.
Because a HELOC credit line allows you to borrow money built by the equity in your home, there are some minimal requirements to qualify for this program: