subject: How A Heloc Can Work For You [print this page] What exactly is a HELOC? Lets first define what those letters stand for: Home Equity Line of Credit or Home Equity Line. A home equity line of credit (HELOC) is a revolving line of credit based on the equity from your home. Instead of borrowing money in one lump sum, you could open a credit account similar to a credit card. People prefer HELOCs because they offer high limits, low interest and allow you to draw as much or as little money as you need. How large a HELOC may be, depends on how much equity you have in your home. HELOCs are also tax deductible and have flexible payment terms. Common reasons people open a HELOC include home improvement, purchasing an auto, college funding or life events such as financing a wedding, paying off credit cards, or even for home remodeling. Homeowners love HELOC loans because you pay interest only on what you borrow. For example, say you originally bought your property for $225,000. Over the years it has gone up in value and its now worth $300,000. Instead of refinancing your property for the $300,000 it is now worth, you take a HELOC loan. You get approved for $75,000. Along with the $225,000 on the first mortgage, you also have $75,000 line of credit.Generally, interest rates on these lines of credit are variable, with some offering borrowers the ability to convert to a fixed rate some time in the future.
To qualify for a homeequitylineofcredit (HELOC), you must meet the credit-worthiness standards of the financial institution which may include credit score, employment and debit-to-equity ratio. Assuming you are credit-worthy, the loan limit decides the amount of the revolving line the lender will grant you. This limit is based on the equity value that you have available within your home, that is, the difference between what you owe on the home and the appraised value of the home. The loan limit is determined by taking equity value and multiplying it by a certain percentage, typically 80 percent. If you have $100,000 worth of equity value, the lender will set your loan limit at $80,000 ($100,000 X 80 percent).. HELOCs can also be a good source of funds in emergencies.Most HELOC's have no closing costs. That makes them the loan of choice. They save you a lot of money since no such fee is added to the loan.
Usually, homeequityline of credit offers lower interest rate when compared to
when compared other types of loans. And the HELOC can be an excellent choice for short-term financial needs. The interest you pay each year in a HELOC is tax deductible. Ultimately, this leads to lower real interest rate, meaning even greater savings. However, if you default on the payments of your home equity line of credit, then you can risk your home for the foreclosure. As such, when thinking about acquiring a HELOC Equity facility, it is crucial that you think of the ways that you intend to use the proceeds. And it is advisable that you may not use the home equity line of credit for luxury purchases, vacations, or new cars.
Purchasing a home is always a dream come true. It is however crucial that you understand your finances and the available options to ensure that the financing options you choose are ones that are best fit for you and one which you are able to effectively keep your commitments to.
