Home Equity Line Of Credit

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Mortgage Dictionary -> Home Equity Line Of Credit

With all of the different types of mortgage related loans available, it's easy to understand why consumers get so confused. One type of loan that is commonly confused with other types of mortgages is that of the Home Equity Line of Credit (HELOC). The HELOC is commonly thought to be similar to a second mortgage when, in fact, it's quite different. If you're thinking about getting a HELOC, you'll want to arm yourself with plenty of information about it before you apply for a HELOC loan.

What is the HELOC?

The HELOC is a type of loan that is based off the value of the borrower's home. The home serves as collateral, meaning, the lender agrees to lend the maximum value of the home. Unlike other loans, this loan is not paid in one lump sum, but rather, is made available in a line of credit that can be drawn from over a specific period of time, usually 5 to 25 years.

Some Facts About HELOC

The Interest Rate Does Change. Second mortgages may offer you a fixed-rate loan, whereas the HELOC loan is a variable-rate loan. So it's almost certain that over the course of your loan term, you'll experience the interest rates changing. With how low interest rates were a few years back during the housing boom, it's easy to see how this can be both a good thing and a bad thing.

You Can Use As Much As You Need. One thing that people tend to dislike about other loans is that they must be repaid in full after a specific period of time. The nice thing about HELOC loans is that you decide, based on your spending, how much you'll really have to repay. For instance, if you choose to only use 5% of the home equity credit line, then that's all you'll be repaying, plus the interest, of course. This makes it so that you won't get into a huge amount of debt.

Must Be Repaid at the End of the Draw Period. Unlike credit cards where you can take as long as you want to repay the debt, you are bound to a draw period with HELOC loans. This means that at the end of the draw period, you must repay the entire balance of the loan. So if you've used a lot of the credit, and have only paid the minimum monthly payments, you may find yourself having to make a rather huge payment at the end of the draw period. That's why it's important to use the HELOC wisely and to not rack up a debt that you can't easily repay.