What Are The Advantages Of A Home Equity Line Of Credit (HELOC)
Getting a home equity line of credit is a great way to get access to the equity in your home. In fact, it may be the best way to use that equity – unless you know you have need of all of the money that is available. Here are some of the advantages that you can have with a home equity line of credit mortgage.
First Advantage – Get The Money As You Need It
With any other kind of loan, you will get a lump sum. Your interest rates and payments are set. There are no options. With a HELOC, however, you are given a line of credit and a credit card or checking account that gives you access to the funds. You do not have to use all of it, if you don’t want to. This is especially good if you know that you need some money, but really are not sure just how much.
This kind of flexibility is great, because you are given a draw period in which you can get more money when you need it. This draw period can be up to 11 years. The truth is, who knows what kind of funds you may need in the next 11 years, or so? This gives you access to sufficient money as you need it and for projects – as they come up.
Second Advantage – Pay Interest Only On Money Used
A home equity line of credit only charges you interest on the money that is drawn out of the account. You are not being charged for money that is sitting idle – as it might with other types of loans. With those loans, you are paying interest on the full amount – whether you are using the money or not.
Third Advantage – Lower Interest Rate
The interest on a home equity loan is usually lower than other types of second mortgages. Usually it is just about two percent above the prime rate.
Fourth Advantage – Possibly No Closing Costs
Most HELOC’s have no closing costs! This certainly makes it the loan of choice, and it can save you a lot of money by not having these charges added to the loan. Some lenders will charge you closing costs, so this should be a good incentive to find one that does not. It will result in considerable savings at closing time.
Fifth Advantage – Tax Deductible
The interest that you are charged each year in a HELOC is tax deductible. Ultimately, this brings the actual interest rate down lower and means an even greater savings.
Some lenders may even use a home equity line of credit on top of an 80% first mortgage in order to eliminate the Private Mortgage Insurance. The way it is done is to get the first mortgage, pay your downpayment, and then get the HELOC for the balance. Make sure you also have enough for the closing costs at settlement, too.
A home equity line of credit can come with a number of other fees and charges. Some will charge a monthly fee or an annual one (or both), and others may charge you if you let the money sit too long without using it. These charges can be avoided if you shop around for the best deal. A HELOC is an adjustable rate loan with few caps (if any) in place. Some of these will come with guarantees of convertibility to a fixed rate loan if the interest rates get too high. Also, be sure to look for any penalties that you may incur if you pay the loan off early.
Joseph Kenny
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What is Home Equity Credit Line of Credit (HELOC), whst is the advantage and disadvantage of that?
What is Home Equity Credit Line of Credit (HELOC), whst is the advantage and disadvantage of that?
It is taking a loan out against the amount of your home you own. the downside is that you risk your home if you default on the loan. the advantage is that it is usually lower interest rate than a personal line of credit.
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A Home Equity Line of Credit is a line of credit based on the precentage of your home you have already paid for. For Ex. you have a loan for $100,000 and you have paid 30,000 of it off and owe $70,000 still. The equity would be the $30,000 that you own. YOu could then take line of credit out on the $30,000 that you own. HELOC interest rates are based on the prime rate on Wall Street posted each month, which means that it changes monthly. Prime right now is on the rise. Recently it has been at 7.75% for the last couple of months and now it is at 8%. The prime rate is then added to what is called the Margin. Your margin is based on you FICO(credit score). The better credit you have the better margin you will have. I have even seen negative margins on some loans. So for example lets say you have a 2% margin and then prime rate is 8%. Your HELOC would then have a 10% interest rate. This is pretty high, but lower than most peoples credit card interest rate. Let’s say you have 10,000 in credit card debt and the average interest rate on the collection of cards is 22%. It would be a good decision to take out a HELOC and then use that money to pay off your debt on the credit cards. You would save because of the interest rate. HELOC’s have a cap rate of 18% so that would still be lower than the 22%. Unfortunately the down side of this is that the interest rate changes monthly, as well as the payment amount. There are all different kinds of HELOC/2nd mortgages you can get. Some are No Cost HELOC’s and don’t require you to pay closing costs, but the fine print says you cannot pay the loan off or refinance within a certain time period. Also watch out for prepayment penalties or termination fees. These usually only last for 6 months, but make sure read all the fine print! Also sometimes there is an account maintenance fee that is waived only if you never make a late payment within the first year. If you do miss a payment in the first year you end up paying a maintenance fee yearly for the life of the loan, after the first year you don’t have to worry about being late except paying the late charge. You really should try a fixed rate 2nd mortgage right now instead of a HELOC since interest rates are on the rise.
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Countrywide Employee Training Program
I don’t see many disadvantages. Its a tax deduction and it is a flexible line of credit. You just have to be smart with it. I know a few people that have one, and have used it as a constant source of funds to pay off their credit cards, and then they repeat the process, and they are never able to pay the home equity line down.
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