A home equity lines of credit (HELOC) is a type of loan that allows the borrower use his house as collateral for a loan that that the lender will issue. The loan will be effective for a specified period of time. Since houses are very valuable assets to people, they often do not avail themselves to a HELOC unless it is absolutely necessary. Examples of instances wherein a HELOC is called upon are for medical emergencies, for education, home improvement or to pay of debts, like eos cca. Abusing a HELOC is the main cause for the sub prime mortgage crises.
There are differences between home equity loans and HELOCs. In the latter, a debtor isn’t issued the whole amount up front. Rather, the borrower can use a credit line & borrow (in increments) from the total borrowed amount, which can amount up to (but not beyond) the sum of the loan. The withdrawal period, which typically lasts between five to twenty five years, is when HELOC funds can be borrowed. In order to repay the loan, the withdrawn amount (along with the interest) must be paid.
A HELOC may also consist of a monthly payment that is the absolute minimum, in which case you only have to pay the interest. You should also know that the borrower may make payments, of any amount, as long as it is greater than the minimum payment. It should, however, be less than the outstanding balance. At the end of the draw period, you are required to pay the principal amount. The repayment at the end of the draw period may either be through a loan amortization schedule or a lump sum, which is called a balloon payment.
Another difference between a HELOC and a conventional home equity loan is that the HELOC has a variable interest rate. That is, the interest rate of a HELOC is based on a prime rate, which is an index. Thus, the interest rate can vary over a period of time. You should also note, that not all lenders for HELOCs have margins that are calculated the same. The margin is the difference between the interest rate and the prime rate that you will pay. So one must see to it that they don’t get overwhelmed by a volatile interest rate, as it can (quickly) make a HELOC too difficult to pay off, causing one to go into arrears and be left at the mercy of diversified debt collection, or some other debt collector.
In the early 2000s, Americans used HELOC loans to great degree. This is due, in part, to the fact that federal and state laws made the interest rate deductible. Thus, the cost of borrowing funds (from a collateralized home) became lower. It also offered a good tax incentive that has advantages over other methods, such as credit cards. HELOC loans are also flexible, which gives another advantage. The flexibility is both in the repaying schedule and in borrowing.
Furthermore, second mortgages have a less than favorable image compared to HELOC loans, with the former implying an undesirable amount of debt. However, within the lending & borrowing of industry itself, HELOCs are recognized as secondary mortgages. Since the underlying collateral of a HELOC loan is the home, the failure of the borrower to repay the lender, may result in the home’s foreclosure. Thus, most lenders require that the borrower is able to maintain a certain level of equity in the home before they agree to a HELOC.
Many mortgages in the United States are different from loans in countries such as Canada. In the latter, loans are generally recourse loans. In contrast to this, non-recourse loans are typically used in the United States. This type of loan does not hold the borrower personally liable for the pledge of collateral. Thus, a HELOC loan may incur liabilities for the home owner, if it is a recourse loan. This distinction is important during times of foreclosure. A borrower has personal liability for the foreclosed property’s recourse debt; if this debt is not resolved, it is then sent to debt collectors, like transworld collection.
As you can see, HELOC loans have their advantages and disadvantages. There are many reasons why you might choose a HELOC loan, and there are also reasons why you may not. HELOC loans are good for education, for instance, because it is a way to fund the future. You should avoid using HELOC loans for day-to-day expenses. That being said, the importance of knowing what HELOC loans are, lies in the fact that you have options if you need cash and you have no other sources for it.
Should your find a HELOC lender, question whether they are willing to negotiate certain terms on the line of credit, some of which will ensure that you will not become financially overwhelmed.