HELOC or home equity line of credit is one where the lender agrees to lend maximum amount within a mutually agreed time span. The period is called a term and the collateral is the equity of the borrower on his or her house.
Use of Home Equity
Home is the most valuable possession for any person and that is why it is usually made the equity only in case of major loans only. Cases in which the home is used as collateral are For meeting the educational expenses of the children.For improvement of home or renovation works.For marriage and such other occasions.For footing unforeseen medical bills.Any contingent situation where the expenses cannot be deferred for long.
HELOC Abuse
However, for day to day expenses, or meeting the smaller bills home is not used as the equity by the borrowers. When it is done or the equity home loan is obtained for trifle uses, or HELOC is abused, it is referred to as subprime mortgage crisis.
HELOC Features
Main features of HELOC are It is a line of credit that is extended with the borrower's home as collateral.After establishment of maximum loan balance, homeowner may draw on the line of credit at his or her discretion.Interest could either be fixed or variable on such mortgage finances.Usually interest is based on prevailing prime rates and borrower should remain updated on current mortgage news and rates.
Once there is a balance on the loan, the homeowner has the option to choose the repayment schedule so long as the minimum interest payments are made on a monthly basis.HELOC terms of repayment could be anything in the range of 5-20 years.At the end of the time span the loan has to be repaid in full.
Conventional Loan and HELOC Compared
Differences between HELOC and traditional home equity loan are as follows.In HELOC borrower is not given the entire advance upfront.HELOC funds should be drawn during the draw period of 5-25 years.Repayment is made considering the principal with interest.HELO often has a monthly payment requirement that might be confined to interest only.Debtor is allowed to make repayment of any amount at any time during the time span which should be less than the total outstanding amount.
Full amount is payable at the end of the period and balloon payments can also be made to reduce the overall payables.