What is a HELOC?

By RefinanceRate.com Home Equity Loan, Mortgage, Refinance Comments Off

Many wonder, what is a HELOC? Short for home equity line of credit, HELOC is a loan set up for maximum draw, not for a fixed dollar amount. HELOC is a line of credit secured by your home that gives you a revolving credit line to use for large projects or expenses.

HELOC often has a lower interest rate than other loans, and the interest is usually tax-deductible.

What is a HELOC and How’s it Work?

Again, a HELOC is home equity line of credit secured by your home, giving you a revolving credit line to use for large projects or expenses. With this loan type, you’re borrowing with the available equity in your home, using it as collateral for the line of credit.

Similarly to a basic credit card, as you repay your balance, the available credit amount increases again. This is a great aspect to the HELOC, as many look to borrow again and again, as long as it is within the established credit limit.

Requirements

To meet the requirements of HELOC’s, the amount you owe on your home must be less than the value of your home. In other words, you need to have equity. You can usually borrow up to 85% of the value of your home minus what you’re still borrowing.

Lenders typically account for other factors as well, such as credit score, employment, income, etc.

We’ve cleared up the question, ‘What is a HELOC,’ and even told you how to meet it’s requirements. Now it’s time to discuss some pros and cons..

Advantages of a HELOC

HELOCs are great for funding major payments or projects, such as paying off college tuition, making home improvements, or paying off major credit card debt. Homeowners enjoy the luxury of drawing and paying interest only on war they need.

Another benefit of HELOCs are that upfront costs are usually low. On a $150,000 standard loan, for example, settlement costs might only be $2-5,000. If the borrower pays a high enough interest rate, however, the lender may pay for that as well.

Many HELOCs are convertible into fixed-rate loans at the time of a drawing. This proves to be a popular and useful option for borrowers looking to draw a large amount.

HELOC Risks

HELOCs major flaw are their tendency to be negatively affected by changing interest rates. All HELOCs are adjustable rate mortgages (ARMs), but they are much riskier than standard ARMs. HELOCs can be affected extremely quick in the event of a market shift. This poses as a major concern.

In the recent memory bank of many homeowners is the financial crisis of 2008. During this time, lenders had the right to cut an unused credit line—an option many lenders took as property values plummeted. This left borrowers with a loan they did not sign up for, and left many cautious to trust this loan.

Given, HELOCs have been making a major comeback with American homeowners as property values continue to rise.