Home equity line of credit – what you need to know
1. Home Equity Line Of Credit – What You Need To Know
The financial sector has revolutionized to such a great extent over the past few decades that it has
solutions for every persons needs. A home equity line of credit, also known as second mortgages, is one
such financial solution that allows the homeowners to borrow money against their homes. Let us have a
detailed look at how this loan works and what are its benefits and drawbacks as follows:
What is a Home Equity Line of Credit?
A home equity line of credit is basically a variable rate home equity loan. Abbreviated as HELOC, this
type of loan works much like a credit card where you, the borrower, can take as much money as you
want by leveraging the equity in the home. In future, if you again need money for meeting the financial
needs of the time such as business expansion, school fee, or home renovation, you can then again
borrow against the home.
Talking about the monthly obligations, as these loans are variable rate loans, the monthly payments are
mainly influenced by the amount withdrawn and current market rate. Another important aspect is the
repayment term. Similar to any other type of fixed rate loans, the payback period for HELOC is also fixed.
You have to repay the loan in full by the end of the term.
Benefits
The biggest benefit of home equity line of credit is that, it is an easy source of cash. If you have
considerable equity in your home, you can tap that equity and fulfill your monetary needs without much
trouble. Furthermore, though the interest rate on HELOC is more compared to that of first mortgages, it
is still much less than the interests on other consumer loans and credit cards. Additionally, the interest is
tax deductible. Hence, it is advisable to consolidate your debt with the home loan to enjoy the manifold
benefits like lower interest rate, extended repayment term, and tax benefits and many more. It is the
best way to arrange funds for short term, recurring costs such as payment of quarterly school or college
fee.
Pitfalls
One of the major drawbacks of home equity line of credit is the variable interest rate. Though it is
beneficial in some way, it is disadvantageous as well. For instance, if the interest rate at the time of
2. borrowing was less and suddenly the market rate goes up, you will have to pay more. This bears more
risk, since you have to be ready for both ups and downs. Another pitfall is that, if you fail to repay the
complete loan amount within the agreed time interval, the lender can foreclose your property and put it
for sale to get his/her money back. Therefore, if you do not want to lose your property, make sure that
you borrow for the right reasons.
It is recommended to do a complete research for finding a competent lender. Consulting a
knowledgeable broker will introduce to more better and reliable options, since they have inbuilt
contacts with potential lenders who are keen to offer homeowners with such loans and that too at very
affordable rates. Moreover, conducting a careful review of your financial background before borrowing
the money will help you in avoiding the pitfalls.