Home equity line of credit (HELOC)

Home Equity Line of Credit (HELOC)

A home equity line of credit is similar to a credit card or any other type of credit line. If you own a house that has equity, you can borrow against that equity for as long as you have the line of credit loan. Just like a credit card, you can borrow up to a certain limit as you need money.

The basic features of a home equity line of credit are:

  • Your home equity line of credit can be used just like a credit card.
  • You only pay interest on the amount that you borrow, unlike a home equity loan. If you want to build a deck on the back of your house or consolidate debts, you can borrow the exact amount you need, no more, no less. Unlike a home equity loan, where you borrow a lump sum all at once, you only use the exact money you need with a HELOC.
  • The time period is of a home equity line of credit is set by the lender at the time you open the line. In most cases, this is typically 10 years.
  • The interest you pay is tax deductible, unlike a credit card.
  • The interest rates are lower than most credit cards, but generally are higher than a home equity loan.
  • The interest rate is floating and will change when the market interest rate changes. This is typically determined by a certain interest rate benchmark, usually the prime interest rate.
  • A HELOC can be used for anything.
A home equity loan generally has a lower interest rate than a home equity line of credit. With a HELOC, you will also have to pay higher interest payments if the general interest rate environment increases, unlike a home equity loan that has the fixed rate that was established the day you took out the lump sum loan.

Home equity line of credits are becoming a popular option because of their flexibility. You can establish the line of credit, and only use it if you absolutely need to during an emergency. People also like how you borrow exactly the amount that you need an no more, unlike a loan. You can use the funds for anything you need. The most common are debt consolidation, children's education, property purchases or home improvements.

Please be careful with what you use your HELOC for.

The last thing you want to do is go deeper into debt with a home equity line of credit. Think through very carefully why you are establishing a line of credit. Use it for something that will help improve your financial picture (education, home improvements and debt consolidation), not hurt it (vacations, cars, clothes).

 

HELOC Home equity line of credit picture


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