What is a Home Equity Line of Credit
If you are in debt, a Home Equity Line of Credit (HELOC) can be a good solution to help you get out of debt. However, such a line of credit must be handled properly. Poor management of a HELOC can actually worsen your financial situation.
A Home Equity Line of Credit, which is also deemed a ‘second mortgage,’ allows you to obtain credit based on the market value of your home. Generally, you can have access to up to 80% of the appraised value or purchase price of your home. The HELOC differs from the home equity loan, as it does not offer you a lump sum of money in a single transaction. Instead, you are given a credit limit from which you can borrow any amount, at any time, until you have reached your limit. A HELOC does not have a concrete period of repayment, so you can continue to borrow against it, much like you would with a credit card. The interest rates vary, and you are only charged interest on the amount you have actually used.
The Advantages of a Home Equity Line of Credit
Since the interest rates on a Home Equity Line of Credit are generally smaller than those of typical credit card companies, many people use their HELOC to pay off their more substantial debts.
Another advantage is that interest is applied only on the amount of money you have spent, and not on the entire credit line amount, which equals the appraised value of your home. You will not have a structured payment plan to adhere to, but you will have to pay the interest every month. If you borrowed a relatively small sum to pay off pending arrears, the interest rate will also be relatively low. Consequently, you may be able to pay off your debts rather easily.
The Disadvantages of a Home Equity Line of Credit
There are a few disadvantages to a Home Equity Line of Credit. Since the interest rates vary, changes in the market can suddenly and seriously impact a HELOC. Most flexible rate mortgages have adjustment caps that limit the size of any rate change, but a HELOC does not.
Keep in mind that whenever you borrow against the equity of your home, you are using your home as collateral. Failure to repay the loan requirements can result in foreclosure of your home. Therefore, it is imperative that you borrow only an amount that will comfortably suit your budget.
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Home Equity Line of Credit
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