Home equity line of credit

From Debt Free Dude
Jump to: navigation, search

Similar to a home equity loan a home equity line of credit (HELC) gives you an account that you can spend money from and deposit money to. You pay interest on any amount outstanding. However, since the loan is guaranteed by your house you will typically pay a lower rate than you would with an unsecured loan or credit card.

The advantage of a home equity line of credit is the flexibility and low interest rate. Some months you can have a balance of $0, but still have the ability to take out a loan for several thousand dollars without requiring any additional paperwork. The downside is the fact that the loan is secured by your home. While this gives you a very low rate of interest, it also puts your home at risk if you can't pay back the money.

A Home Equity Line of Credit or HELLOC, is a type of loan in which the lender agrees to give the borrower a maximum amount of funding for a certain period of time. As in a home equity loan, the property is what is being used as collateral. This type of a loan is different from a Home Equity Loan in that it does not borrow the entire sum from the lender at once.

Before taking out a HELLOC loan, it is very important that the user understand how interest rates are considered with this type of loan. Interest rates often change over time, and if the time allotted for the loan is 25 years, the interest rate could vary a great deal in that amount of time. It is always a good idea to ask the lending bank how it plans to handle the interest rate fluctuations so that the borrower in question does not end up owing more than he or she can pay back.

With the taking out of a Home Equity Line of Credit, it is very important to note that failure to repay the debt in a timely manner could result in foreclosure. After foreclosure occurs, sometimes the lender will agree to a short sale or debt arbitration. These methods are becoming increasingly common in the housing market of today.

In conclusion, just as with any other loan, it is very important that a person taking out the loan understands the fine print and is financially capable of paying back the funds borrowed in the agreed amount of time. A miscalculation could result in a financial disaster for the borrower, which ultimately reflects on the credit score of that borrower. Credit scores are very difficult to repair once they are ruined, so it is a good idea to consider other options before taking out this or any other type of a loan.