More and more lenders offer home equity lines of credit (or HELOC's). Home equity lines of credit allow a homeowner to use their homes equity. Like a revolving charge card, the home equity line of credit also has a specific limit.
Many people use the line of credit for home improvements, to finance a child's education, home repairs or other expenses.
Also, under the tax law--depending on your specific situation--you could deduct the interest because your house secures the loan.
Before deciding on a HELOC, you should weigh the costs of a home equity line against the benefits. A traditional second mortgage could work more to your advantage. A second mortgage loan is when you receive a lump sum loan. See the HELOC vs. Second Mortgage comparisons below.
So, comparison shop for the credit terms that best meet your borrowing needs without posing undue financial risk on yourself. Remember, failure to repay the amounts you've borrowed could put your home at risk of foreclosure.
What Else Should I Know About A HELOC?
With a home equity line of credit, bank will approve you for a specific amount of credit or credit limit. This is the maximum amount you may borrow. Most lenders decide the credit limit on a home equity line by taking a percentage (say, 80 percent) of the home's appraised value and subtracting from the balance owed on the existing mortgage.
For example,
Appraised Value $100,000
Percentage X.80%
Percentage of Appraised Value $80,000
Less Balance Owed 50,000
Potential Credit Limit $ 30,000
Note: Your lender will also consider your credit history, fico score, income and expenses in addition to your homes equity.
Most HELOC plans set a specified period where you can borrow money, such as 10 years. At the end of this "draw period," you can to renew the credit line if approved by the lender.
Some plans do not allow renewals; in that case you won't be able to borrow more money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period (the "repayment period"), for example, 10 years.
Once approved for a home equity line of credit, you will receive special checks should you want to withdraw money from your HELOC. On some plans, homeowners can use a credit card or other means to draw on the line of credit.
Many plans may want you to borrow a minimum amount each time you draw on the line (for example, $300) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when setting up the plan. These are facts you want to consider when shopping for the best HELOC for your needs.
Make sure you read the agreement carefully, examining the terms, conditions and cost of available plans.
Quiet Dangers of HELOC's Although many homeowner's like the convenience and ease of having home equity lines of credit, you should go with caution. Here's a few examples.
Most Have Variable Rather Than Fixed Rates. That means your payments will change, often upward. That's why it's important to find out which index the lender uses to decide your rates. You'll also want to know how often the value of the index changes. Plus you'll want to find out how high it has risen historically and the margin.
Don't Ignore Hidden Cost of a HELOC In the excitement of getting approved, many homeowners overlook the true cost of a home equity line of credit. For example, the cost of setting up a HELOC is similar to the cost you pay when you bought your house.
For instance, a property appraisal fee or estimate, a loan origination fee, annual maintenance fees, even a prepayment fee if you close your account too soon. Other restrictions could apply as well, such as renting or leasing your home and more.
Lines of Credit vs. Traditional Second Mortgage Loans.
While considering a home equity line of credit, you should also consider if a second mortgage loan could better meet your needs. A traditional second mortgage can give you a fixed payment. . In most cases, the payment schedule will give you the security of equal payments that will pay off the entire loan within the loan period.
You might also think about a second mortgage as opposed to a home equity line, if for instance, you need a specific amount for a set purpose, such as a new roof or plumbing.
Conclusion Now that you have a clearer view of what a HELOC is, you can make a more intelligent and informed decision on which direction to go. You also have the facts that will help you protect yourself.
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