Watch Related Videos
comments
A Home Equity Line of Credit, or HELOC, refers to a loan program where a lender agrees to lend a borrower a pre-approved maximum amount of money within an agreed period. Home equity lines of credit differ from standard loans or reverse mortgages in that the borrower is not advanced the entire sum of the loan up front, but rather withdraws funds from the line of credit as may be needed by the borrower. However, while the borrower may withdraw funds from the line of credit as needed, the borrower may not withdraw more than the pre-approved credit limit.
At the closing of a home equity line of credit loan, you will be assigned a pre-approved credit limit that you may borrow up to - this is not a check and you probably won't receive money up front unless you have requested it in advance.
Home-equity lines of credit usually include a draw period that last anywhere from 5 to 25 years and allows you to borrow HELOC funds whenever you feel you need them; you are only required to pay back the amount you use plus interest.
Benefits of a Home Equity Line of Credit
One of the major advantages a HELOC loan is that you're only required to pay the interest on the loan until the end of the draw period. However, at the end of the draw period, you will have to make a decision on how to finish paying loan. Generally speaking, you can choose from the following three options:
- You can pay back the full principle of the HELOC amount borrowed immediately
- You can choose to pay a home-equity line of credit balloon payment
- You can choose to pay on the loan using a loan amortization schedule or table
A HELOC versus a Conventional Loan
A HELOC differs from a convention alone in that interest loan on a HELOC will generally be variable and may change over time. In fact in most cases you can rest assured that the interest rate will change from time to time.
Another popular feature of home-equity lines of credit is that interest paid on these types of loans is usually deductible when you file your federal and state income tax returns. This may help offset the interest costs that are associated with a HELOC.
Disadvantages of a HELOC
While there are certainly some benefits that a HELOC offers, there are some times when a HELOC may not be a good idea. For example, if you owe more on your house than your home is worth -- you are what is usually referred to as being upside down in your home. Furthermore, many lenders will extend lines of credit that effectively can place you in much more debt than the sale of your home could relieve you of.
Therefore, if you are approved for a home-equity line of credit, you may find yourself in a position where selling your house may not be a good option because you would not be able to pay off your mortgage and the HELOC with the proceeds of the sale.
Therefore, if you are considering loan options to help pay for home renovations, debt consolidation or other purposes you should carefully evaluate if a HELOC loan is best for you or not. Generally speaking, you should only apply for a home-equity line of credit when you have sufficient equity already built up in your home.
