In times of financial difficulty, most people tend to turn towards their home as a much-needed source of attaining some cash. Whether you need the funds to pay off some bills, remodel your home or even consolidate your debt, a HELOC or home equity line of credit can ease your financial burdens.
How Does a HELOC Work?
A home equity line of credit is actually a form of revolving credit that is secured by the equity in your existing home. Relatively similar to a credit card, a HELOC is a type of loan that can either be paid down or charged up for the term of the loan. Under a home equity line of credit, your lender typically approves a specific amount of credit, which stands as the maximum amount you are able to borrow at any one time.
When it comes to determining the credit limit you will be granted, your lender will take certain factors such as your income, debts, and credit history into consideration and review them all accordingly. An appraisal of your home will also be needed to establish the market value. The credit limit on your HELOC is also based on a percentage of your home’s appraised value, which is then deducted from the outstanding balance you owe on your existing home loan.
When you take out a home equity line of credit, you are required to pay for expenses similar to those associated with your first mortgage. These include:
- Application fee
- Title search
- Property appraisal
- Attorney’s fees and points
The loan rates and fees attached to HELOCs are generally low, which is one of the reasons borrowers are attracted to this type of home loan. With lower mortgage rates and fees, borrowers are better able to finance pressing financial needs such as home repairs, renovations, medical bills or even their children’s’ college tuition. Aside from competitive interest rates in comparison to other financial sources such a credit card; interest paid on a home equity line of credit can also often be tax deductible.
Home Equity Line of Credit vs. Home Equity Loans
If you’re not quite sure what the difference between a HELOC and a home equity loan is, you’re not alone! People often confuse one with the other. It’s perhaps most confusing when you are trying to determine the best way to make use of the equity in your home. So, how exactly does a home equity loan differ from a home equity line of credit?
To put it simply, a home equity loan is where you borrow a fixed amount of money and use your home as collateral against the loan. On the other hand, a HELOC is a line of credit that you can borrow against as many times as you need to, provided you stick to the agreed upon limit on your approved line of credit.
Another significant difference between these two types of loans is that a HELOC requires that you pay interest only on the money taken out of the account. Therefore, if you don’t use any money from your line of credit, then you don’t have to make any monthly payments. To sum it up, a HELOC can be a good option for you because it enables you to use the line of credit if you need to without having to pay interest if you don’t. However, bear in the mind that depending upon how much you use your home equity line of credit; you will most likely be required to pay a minimum monthly payment.