How does a home equity line of credit work?
In many ways, a HELOC works much like a credit card. When you take out the loan, the lender sets a limit. Using lender-provided checks, you can borrow an amount up to that predetermined limit. Any amount that you borrow from the home equity line of credit is deducted from the amount available to you. As you pay it back, however, the amount becomes available to you again. Usually, a HELOC has a variable interest rate. You only pay interest on the amount that you withdraw, and the minimum monthly payment is usually interest-only or a small percentage of the outstanding balance. However, by stretching out payments, you make the total cost of the loan much more. What is a good use of a home equity line of credit? Home equity loans are generally better if you need the money all at once. A home equity line of credit is more appropriate if you need the money spread out over intervals. Here are some circumstances under which a home equity line of credit is preferable: • Home improvements. If y
A Home Equity Line of Credit (HELOC) works more like a credit card than a regular loan. You are allowed to borrow up to a certain amount for the life of the loan, based on the equity you currently have in your home. A HELOC has a variable interest rate based on the Prime Rate. There are numerous options regarding the draw period and repayment periods. During the draw period you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Let’s say you have a $50,000 line of credit. You borrow $10,000, but then pay back $5,000 toward the principal. You now have $45,000 in available credit.
Based on the equity in your home, a line of credit can be established. This line can be used anywhere or at any time you choose – all at once or a little at a time – simply by writing a check. Once your line of credit is in place, no preapproval is needed for purchases or advances. As balances are paid down, those dollars are once more available, up to your established credit limit. And best of all, interest on a home equity line of credit is generally tax deductible (consult your tax advisor for additional information).
