Home Equity Line of Credit (HELOC) Loans
with the Best Mortgage Rates
When homeowners need extra funds to help cover expenses, a home equity line of credit, or HELOC, seems to be a convenient way to go. Even though HELOC can be an alternative resource for numerous mounting debts and other financial obligations, it is important to understand how it works to avoid any potential hiccups in the process.
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What is a Home Equity Line of Credit?
A home equity line of credit (also known as HELOC) is a loan in which the lender agrees to lend a maximum amount within an agreed period (i.e. term). Even though HELOC resembles a second mortgage, it really functions like a credit card and it uses your home as collateral against default to secure the money you borrow.
Who qualifies for a Home Equity Line of Credit?
To qualify for a home equity loan (HELOC), borrowers must maintain 10% to 20% of their equity after taking the loan or line into account. To figure out how much you can borrow, subtract the balance you owe on your mortgage from what your home is currently worth. As for credit scores, the requirements vary greatly by lender, but good credit history is typically necessary. In addition to home equity, lenders will want to know what equity’s appraised value is, your income, and any outstanding debts.
Pros of a Home Equity Line of Credit
Lower Interest Rates
One of the great benefits that comes with HELOCs is having a lower interest rate than the one paid on an unsecured credit card. The catch, of course, is that your home secures the HELOC.
Low to None Closing Costs
Unlike standard home equity loan, a borrower typically doesn’t suffer high closing costs (if any) by setting up a HELOC. As long as your credit score is good, there is usually no application fee, and no closing or appraisal costs.
No Transaction Fees
While credit cards often charge a fee for withdrawing cash, there is no fee to draw funds from a HELOC. If your lender is charging a fee for each withdrawal transaction, that's a good sign to look elsewhere.
Unlike other forms of revolving credit, the IRS allows you to claim the interest you pay on a HELOC as a tax deduction. To qualify for such, the size of your HELOC debt must be less than $50,000 ($100,000 for married couples filing jointly).
One of the most prominent factors that influences your credit score is your payment history with creditors. By making timely payments on your HELOC, you can increase your credit score.
Cons of a Home Equity Line of Credit
Your Home as a Piggy Bank
If borrowing for home improvements, business investments, or tuition bills, a HELOC can be a great backup if emergency funds are not available to help you get through a debt problem. However, using your home as a piggy bank for immediate wants may not be a good idea. A trip to Bahamas may bring you some great memories, but your debt will stay with you until the last cent is repaid.
Even though HELOCs may look like an easy solution for debt consolidation, there are times when they can add to debt woes as well. These times are known as a “reloading” cycle, and it signifies the instances in which the homeowner must borrow money repeatedly to make ends meet.
Adjustable Interest Rates
Unlike home equity loans that have fixed monthly rates and no unpredictable payments, a HELOC is based on adjustable interest rates. In other words, even while being as low as they are, interest rates are usually variable, and they adjust in relation to a chosen financial index. And since you are paying interest on the balance due, the monthly payment will change in tandem with the interest rate.
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