Home Equity Line of Credit (HELOC) - Home Equity Line of Credit (HELOC) is a line of credit against which a homeowner can borrow as often as his financial situation calls for. He can borrow and pay off the debt any time he chooses. When there is an outstanding balance, the required payment is the interest accrued every month. When there is no balance, he incurs no finance charges.A heloc can be used when interest rates are low to purchase vehicles and other large items which would normally be financed with fixed rate loans. Check with your tax consultant about writing off the interest that is paid on these items. HELOCS can have a check and credit card attached to them for ease of use when purchasing against the equity of your home.
Ways to use your Home's Equity to your advantage is to get the rate down as low as possible. One option is Auto debit. You can receive a discount rate if you automatically debit a set amount each month from your credit line. It can be used to pay bills or car payments. Option two, some lenders will give you a discount rate if you agree to use your credit limit as soon as you get it.
Most banks allow homeowners to borrow up to 100% of the house value. A handful of "non-prime" lenders even lend up to 125% of the value. As one can imagine, there are many restrictions on such high Loan-to-Value Home Equity Line of Credit. One of the most common restriction is an appraisal report on the property to ensure the house value is supported and that the local housing market is not in a down trend with declining values.
HELOC's are usually fully indexed at the Prime Lending Rate plus an additional number of interest points depending on what the borrowers credit score is, and how much money is borrowed against the property -vs- its' value.
Home Equity Loans, similar to all mortgages, are secured by the house. Should the homeowner defaults on payments, the bank can foreclose on the house that is used as collateral.
Home Equity Line of Credit - Home Equity Line of Credit or most commonly reffered to as "HELOC", refers to a loan in which the lender agrees to lend a maximum amount within an agreed time period.
A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to.
A draw period usually lasts anywhere from 5 to 10 years and allows you to borrow HELOC funds whenever you feel the need; you’re only required to pay back the amount you use plus any interest.
There are two types of home equity loans: a fixed rate loan, or an adjustable rate line of credit.
The fixed rate home equity loan is attractive when you need the money immediately. This type of loan gives you protection against rising interest rates. They typically take the form of a fifteen year fixed rate, or a thirty year amortization with any outstanding balance due after fifteen years.
A home equity line of credit, on the other hand, is attractive if you do not need the money right away. You only pay interest on the amount outstanding. Therefore, if there is no balance, there are no payments. When there is a balance, the lender typically requires that you only pay the interest due. The lenders typically let you draw on the line for up to twenty years, and then require you to pay back principal after the draw period has expired.
Some HELOCS have minimum draws at close. This means that you will have to take a minimum cash out amount at close. Be sure to ask your mortgage broker if your HELOC has a minimum draw at close.
Most Heloc's, Home Equity Lines Of Credit, have an adjustable interest rate that is tied to a certain index. Some examples of indexes are: Libor, Prime, Cofi, MTA, etc... The rate will usually be index + the margin. The margin is usually based on the loan scenario, your credit scores, your LTV (loan to value), and equity line amount. The better your situation and the better the loan looks, usually the lower your margin will be. An example might be: if you were only borrowing a 30k home equity line, you have a home that is worth $300,000, you only owe 100k on your first loan, and your credit score is over 750 you may qualify for a loan that is prime + 0 for the margin. This means that your loan interest rate will always be equal to whatever Prime is. Now for the same situation, but with a 650 credit score and a 200,000 balance on your first loan, your credit is worse and your loan to value is significantly higher, so you will probably have a higher margin on your equity line: something like prime + 3.5% for your margin. Therefore you interest rate will always move up or down with Prime plus the 3.5%.
An advantage to opening a home equity line of credit even when not in need is to lock in the ability to tap into the equity built in the house. If the value of the home should decline, rather than losing financial power due to shrinking equity in the house, the homeowner would still have the full financial power to use the line of credit, which was opened when the home value was higher.
Many homeowners actually originate a home equity line of credit even when they have no immmediate need for money. The beauty of this program is that you do not pay any interest on the equity line until you actually draw the funds. Having the HELOC can serve as a savings account of sorts or "rainy day" money if you will. It allows homeowners quick access to cash should ever a need arise.
