A Guide to HELOC

This article aims to inform on how a Home Equity Line of Credit (HELOC) works. A HELOC is essentially a loan against your property; but you do don’t get all the money at one time as you would with a home loan. You are released certain amounts as and when you need them. It’s a line of credit, something like a credit card. A HELOC will let you avail money equivalent to 80% of your property value. The amount can go up to 125% of the property value when the real estate market is strong.

HELOCs are offered by banks and mortgage lending institutions. The terms of a line of credit will depend upon any existing mortgages that you have and the equity that you have in your property. A HELOC may require you bear the cost of application fees and appraisal costs. Any other expenses will be deducted from the loan amount. Once the loan is closed you get a checkbook that you can use to access the loan amount as and when the need arises. You may also be given a debit card for use; be careful and keep the card secure.

The rate of interest is governed by the prime rate. If you have a good credit score, you may be charged one percent over the prime rate. HELOCs come in different flavors. Some can be variable interest loans; some are fixed-rate loans for around 20 years with the first ten years being interest-only payments. Still some HELOCs may have balloon payments at the end of the loan period.

A HELOC can be paid off anytime; but check if there are any prepayment penalties. If you are going for a loan with an interest-only period check if the duration of the interest-only payments suits your purpose and if you can alter conditions anytime – like perhaps change the HELOC to a home loan or make it into a fixed-rate HELOC. Also find out the nature of tax deductions that you can avail with a HELOC.

Keep an eye open for changes in the HELOC interest rates so that you can weigh your refinance options and refinance to a loan with better interest options.

The rates and terms of a HELOC are usually better than those offered by credit cards and you should consider a HELOC for consolidating credit card loans. But always keep in mind that a HELOC is a secured loan against your most valuable asset – your property.

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