What is a Home Equity Line of Credit?

A home equity line of credit or HELOC is a loan based on the amount that has been paid already

. A good example is if you have a loan of $250,000. So let us say you already paid $100,000, which means you still have $150,000 left to pay. The $100,000 is the equity. You can use this line of credit to borrow money amounting to $100,000 and below.

Reference: House Foreclosings

The good thing about a home equity line of credit is that it is, in a way, similar to a credit card. You are allowed to borrow a maximum amount of money, and the draw period is from five to 25 years. Another thing about HELOC is that its interest rate is based on a prime rate. The prime rate changes often in a year, so that means that the interest rate also changes. You can calculate the interest rate by adding the current prime rate to the margin

that is based on your FICO score. If you have a good FICO score, you get a good margin, and thus a better interest rate. It all depends on the current prime rate and your credit score.

Many people use a home equity line of credit rather than the usual loan because they can get lower interest rates. In addition, the interest is usually deductible in federal tax laws and most state income tax laws. However, there are disadvantages as well. As already mentioned, the interest rates change almost every month, and this can be taken as a bad thing especially if the prime rates are rising. Some people also do not want to use HELOC because they might owe more money than their home's real worth.

There are different kinds of HELOC. There are No Cost with a home equity line of credit. If you choose the No Cost HELOC, you do not have to pay the closing cost, but there might be hidden maintenance and termination fees. You also cannot pay off the loan within a period of time.

Reference: Investment Banking Industry

Home equity line of credits can be good or bad; it depends on how you use it. If you are thinking of using HELOC, make sure that you do not have to pay an application fee, maintenance fee, usage fee, check-writing fee, or any closing costs. There are also HELOC loans that change their interest rates quarterly instead of monthly. Always remember to review the fine print carefully. You might not know that you are being required to pay hidden fees every time you borrow money.

Now, for those who do not want to use a home equity line of credit because they are worried about monthly changes in rates, you can look for HELOC loans that offer standard fixed rates. Some HELOC loans can convert the variable rate to fixed rate. This is especially useful in worst case scenarios, such as when prime rates are continuously rising. Or you can get second mortgages instead. With second mortgages, you do not have to worry about rising interest rates, since second mortgages have fixed interest rates.

What is a Home Equity Line of Credit?

By: Brandon H Johnston

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