What Is A Home Equity Line Of Credit And Is It For You?

[Apr 16, 2008.]

 

A home equity line of credit (HELOC) can be a real help to you financially if you need to get a source of money - and have some equity in your home. It gives you various options and a degree of control that you do not have with other type of mortgages. Here are some things you need to know to help you decide if a HELOC is for you.

A home equity line of credit can be obtained as a second mortgage option, or if you should need to refinance everything, it can work for that, too. This line of credit, like a mortgage, is taken out against the equity you have in your home, or against the home itself. The line of credit is money that is available to you to use as you see fit. You draw it out as you need it, or if you need it, and then only pay interest on the portion of money that you actually use.

There is generally a period of time that you can draw the money out, depending on the length of the loan, and then a period when you start paying on the principal. The first part, when you can draw out the cash, does have minimum draw amount, and there is also a minimum amount that you will pay each month, which is usually just the interest.

It is an ideal way to get cash on an as you need it basis, without having to reapply to get new loans, or mortgages. You often are given a credit card, or check, which you use to obtain the money.

Interest on a HELOC has a fixed rate for a brief time, often just a few months, and then it goes to an adjustable rate. This new rate is adjusted according to the market, which also means that it could get quite high - if the economy goes wild. Interest on a HELOC is often adjusted on a daily basis that results in a lot of fluctuation.

The home equity line of credit usually comes with an annual fee, and with less than the other fees that normally come with a mortgage. This keeps it considerably cheaper, as far as fees go, but there are some other things that you do need to watch out for. A "margin" is a percentage of the loan that is added on to your payment each month. So, besides the interest, there is also a margin which could be as much as the interest itself. This fee is usually not disclosed anywhere - unless you ask.

A home equity line of credit can prove to be just what you need to be able to get money for those projects around home, or that new car. Be careful, though, about taking out a HELOC for more than you home is worth on the market. Doing so could mean that you have negative equity on the home and it could take you many years to get any equity on the house at all. Be sure to do some comparison shopping to get the best deal.