A HELOC is a type of home loan that is commonly offered in the market today. Here are the basics of a HELOC and how you can use them appropriately.

HELOC

The term HELOC stands for home-equity line of credit. This type of loan is similar to a home-equity loan in that you are tapping into the equity on your home. This is a loan product that is offered by many mortgage lenders and banks across the country.

How They Work

Although this type of loan is similar to a home-equity loan, it works a little bit differently. This type of product will allow you to access your home-equity. However, instead of accessing it through a traditional loan format, you will have a line of credit that is attached to your home-equity. This means that you do not have to borrow all of the money that you might need all at once. Instead, you can simply open the home-equity line of credit and leave it there until you need it. In order to access the funds, most home-equity lines of credit have a checkbook feature or even a debit card.

Parts of the Line of Credit

Most home-equity lines of credit have 2 different sections. The initial period of the line of credit is known as the draw period. This is the portion of the home-equity line of credit that you can withdraw funds as you need them. Some home-equity lines of credit will require you to take a minimum distribution at the beginning of the line of credit. Others will not have any such restrictions and you can simply take the money out when you need it.

After the draw period, the repayment period will come into effect. This is the portion of the home-equity line of credit in which you have to repay the money that you have borrowed up until this point.

A common example of a home-equity line of credit will have a 10 year draw period and a 10 year repayment period. Some HELOCs will be shorter than this, but this is an average time period for this type of product.

Benefits

This type of product has a number of different benefits. You will be able to deduct the amount of interest that you pay from your taxable income at the end of the year. This can amount to a sizable tax deduction for you. In addition to this, this product will provide you with a lot of flexibility in how you use your home's equity. Many people use it as a source of emergency funds when they need it.

Disadvantages

This product also has a few drawbacks that you should be aware of. Traditionally, interest rates for a HELOC are going to be higher than the interest rates for a home-equity loan. Many people also have problems having access to such a large amount of money and end up spending it on frivolous things that are not necessary. This has led to many people getting in over their heads financially.

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