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Home Equity Line of Credit

A Brief Overview of the Home Equity Line of Credit or HELOC

A home equity line of credit is essentially a loan wherein, the lender agrees to lend to the borrower a maximum amount in a predetermined period. Herein, the borrower pledges his/her house equity as the collateral for the loan.

At first glance, home equity line of credit loans sound very similar to conventional loans that are offered by mortgage companies or lenders. However, there are major differences between HELOC and conventional loans.

No Entire Sum Up Front

Unlike conventional loans, a borrower is not offered a lump sum amount. Instead, the borrower has a line of credit that enables him/her to borrow sums that total up to no more than the fixed amount that the lender has decided to advance to the borrower. The working of home equity line of credit loans is like that of a credit card. This is because at closing, you are given a specific credit limit and you can only draw up to that credit limit and not go beyond it.

The ‘draw’ period usually lasts between 5 and 25 years. The great thing about HELOC is that you only pay for what you borrow and make monthly payments on the same that include principal plus the interest.

Variable Interest Rate

HELOC rates are variable in nature as they are based on indexes such as the prime rate. The interest rate can change through the duration of the loan and is not constant. Those homeowners, who are looking for home equity line of credit loans, must be aware of the fact that not all mortgage companies calculate the HELOC rates in the same manner. Essentially, the margins used are different.

The margin in this case refers to the difference between the interest rate and the prime rate. They will actually pay this difference. When it comes to HELOC rates, lenders do not offer such information and it is up to the consumer to get this information out of them.

Benefits of Home Equity Line of Credit

The popularity of these loans has seen a marked increase in the United States because of the fact that depending on certain circumstances, the interest paid is usually tax deductible under various federal and state income tax laws.

This is yet another way the home equity line of credit loans differ from conventional loans as the cost of borrowing funds is reduced considerably. Moreover, the amount of flexibility offered by these loans in terms of repayments and borrowing is not offered by conventional loans.

Before you go for a HELOC, you must remember that the collateral is your home. This means that if you fail to pay back the loan, you will have to face foreclosure. Therefore, lenders offer such loans only to a borrower who has maintained a certain amount of home equity.

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