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Home Equity Line of Credit (HELOC) Information
A Home Equity Line of Credit is also known as a HELOC and is an adjustable rate line of credit usually based on the Prime Rate. The HELOC product allows you to obtain multiple advances against a line of credit for a maximum draw amount, rather than for a fixed dollar amount and is determined by the equity in the property and is secured by the property, usually as a second mortgage.
It gives you various options and a degree of control that you do not have with other type of mortgages. The line of credit is money that is available to you to use as you see fit. You draw it out as you need it, or if you need it, and then only pay interest on the portion of money that you actually use. HELOC’s have a draw period, during which you can use the line, and a repayment period during which it must be repaid. Draw periods are usually 5 to 10 years, during which you are only required to pay interest and there is usually a minimum draw amount. Repayment periods are usually 10 to 20 years, during which you must make payments to principal equal to the balance at the end of the draw period divided by the number of months in the repayment period. Because the balance of a HELOC may change from day to day, depending on draws and repayments, interest on a HELOC is calculated daily rather than monthly.
It is an ideal way to get cash on an as you
need it basis, without having to reapply to
get new loans, or mortgages. You often are
given a credit card, or check, which you
use to access the money. The home equity
line of credit usually comes with an annual
fee, and with less fees than normally
associated with a 1st mortgage. Some
lenders even offer a “no cost” HELOC. What
also makes a HELOC so popular is that
interest paid is usually deductible under
federal and most state income tax laws;
this makes that cost of borrowing money not as high! Some HELOC’s are convertible into fixed-rate loans at the time of a drawing. This is a useful option for borrowers who draw a large amount at one time.
Pros and Cons of Home Equity Line of Credit:
Advantages
1.HELOC’s are convenient for the ability to borrow money for life’s significant expenses, such as college education, home improvement, new business startup, vacations and other large purchases without refinancing your current mortgage.
HELOC’s are convenient for the ability to borrow money for life’s significant expenses, such as college education, home improvement, new business startup, vacations and other large purchases without refinancing your current mortgage.2.You borrow and pay interest on only what you need.
You borrow and pay interest on only what you need.3.Flexible access to funds by check and/or credit card.
Flexible access to funds by check and/or credit card.4.Interest may be tax deductible.
Interest may be tax deductible.5.Prime Rate has only gone down since 6-06.
Prime Rate has only gone down since 6-06.Disadvantages
1.All HELOC’s are an adjustable rate mortgage (ARM) and the rate can change.
All HELOC’s are an adjustable rate mortgage (ARM) and the rate can change. 2.The maximum interest rate is normally high.
The maximum interest rate is normally high.3.Harder to refinance your first mortgage when you have an existing HELOC.
Harder to refinance your first mortgage when you have an existing HELOC.4.Most have a small prepayment penalty.
Most have a small prepayment penalty. | ||||
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