Home Equity Line of Credit: A Great Source of Financing |
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Home equity line of credit or HELOC, as they are referred to, are extremely useful as a source of money for larger short-term expenses. It is common to use a credit line when you need to borrow against home equity and there is a range of options available from lenders offering these home equity lines of credit. How Home Equity Line Of Credit Works When you opt to go in for a home equity line of credit, the lender establishes a credit limit. You can access this as and when you need it, to the extent of the limit. You can use your credit card or check to draw on this limit. Lenders can provide you with substantial amounts at reasonable rates of interest, bundling in tax advantages that you might not be able to benefit from when you choose other loans. The amount of money that you can borrow on a home equity credit line would depend on your income and credit rating and how much you owe in debts. Taking this into account, lenders can allow you to draw around 85% of your home's value after deducting the amount due on your first mortgage. You will need to know the period involved and how much you can withdraw when your account is opened and whether you can renew your credit line after the draw period on your home equity line of credit expires. Some lenders allow you to repay the balance over a mutually agreed period of time while some require that you repay your full outstanding balance as a one-time payment. The Risk Of Putting Up Your Home As Collateral In a home equity line of credit arrangement, you would be putting up your home as a collateral for the loan. This obviously involves a risk if you happen to delay your monthly payments. In the kind of loans that involve repaying the balance as a single 'balloon' payment, if you don't have that kind of money, you might need to borrow again to settle the debt or face the danger of losing your home if you are not eligible to borrow again. Even if it comes to selling the home, you would have to settle off the money you owe on your credit line. Interest Rates On HELOC The interest rates offered on home equity lines of credit obviously varies which means you can shop around and talk to many lenders to get yourself the lowest possible rate. Usually, it pays to remember that the APR or annual percentage rate for home equity credit lines only takes the interest into account. The cost of credit must be thoroughly studied including points, closing costs, and other charges, as this will add to the cost. Variable interest rates are common and most lenders attract you with very low interest rates. Some also offer fixed rates of interest. Some lenders expect you to pay a one-time fee at the beginning, while some have closing costs or an annual fee payable every year. Since the same loan arrangement cannot work for all homeowners, it is sensible to talk to different lenders and compare and choose the home equity line of credit that suits your situation best. |
