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What is a HELOC?

Filed Under mortgage 

A HELOC is a home equity line of credit.

This type of loan is basically a line of credit secured by a second mortgage on a property. You can borrow a much as you need as long as you do not exceed the maximum loan amount. You pay interest on the outstanding loan balance and not the entire line of credit.

A Home Equity Line of Credit is an open ended mortgage, meaning a homeowner can withdraw and repay as often as he likes, up to the available credit limit. A HELOC works much like a credit card account in that respect. It differs from a credit card account in that a credit card account is an unsecured loan, whereas a HELOC is secured by the homeowner’s property.

Usually, whenever you have a mortgage that is above 80% Loan TO Value, then the difference above 80% is usually a HELOC loan. For example, if you need 95% Loan To Value then your 1st mortgage will be at 80% Loan To Value and at a lower rate and the remaining 15% will be considered a 2nd mortgage and be a HELOC.

A HELOC (home equity line of credit) is an excellent financing tool, for some borrowers. A HELOC is essentially a line of credit secured by a mortgage or deed of trust on your home. You only pay interest on the amounts you borrow on the HELOC. If you don’t use any of the line of credit, then you don’t make any monthly payments. You can draw from the HELOC by writing checks issued to you by the lender. Usually a HELOC is considered a second lien on your property.

It’s important to be careful with HELOC’s. As any other type of credit they have a good use but one can end up spending too much with this line of credit. If you are paying off other debts such as credit cards ampersand autos it might make sense to get a standard fixed rate 2nd mortgage where you get the lump sum at closing to pay off all debts and then you pay on that mortgage along with your first until it’s paid off. You won’t have the ability to pull money whenever you think you need it. On the flip side of that, if you have income that comes in large quantities and is sporadic or not stable. This type of loan might be used as a cushion for the times in-between the checks.

A HELOC is a far superior debt device than using a credit card or financing a car/boat/ RV purchase. One of the many advantages to using a HELOC is that the interest expense is tax deductible. Essentially you are saving 25-35% on every interest dollar as it is deducted from your income when you do your year end tax preparations.

Many HELOCS today offer a credit card which can be used at your favorite stores and restaurants.

Usually the rate on the Heloc is the prime rate plus a margin.

A HELOC is traditionally based on the prime rate and a margin is added to reflect the true rate to be paid by the borrower. HELOC’s may offer a initial lower rate (Teaser rate) for a specific time period. When the defined time period has expired the rate will adjust to prime + margin.

HELOC(s) or Home Equity Line(s) of Credit are very popularly used as the “20″ in an “80-20″ or 80/20 piggyback mortgage strategy.

A Home Equity Line of Credit can also be used to purchase the property or as a first lien on the property. The HELOC can be used to payoff or consolidate debt, personal use, or just to have.

A home equity line is a revolving credit line tied to the equity in your home. Most home equity lines use the prime rate as a base for setting interest rates. For example, you hear lenders describe rates as prime + zero or prime + 1. This means the borrower will pay monthly interest according to the Prime Rate (lets use an example prime rate of 5.00%) plus a margin. In this case, prime + zero would equal an interest rate of 5.00%, or in the case of prime + one it would be 6.00%. Additionally, most home equity lines have interest only payments.

Is your rate too high? If you're looking to compare mortgage rates or to get a rate quote on a FHA loan start here


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Comments

One Response to “What is a HELOC?”

  1. Lee Matthews -- Financial Concepts West on January 23rd, 2008 3:17 pm

    “A HELOC (home equity line of credit) is an excellent financing tool, for some borrowers.”

    I’d put it in stronger terms — A HELOC is now an excellent financing tool for *all* homeowners.

    More and more folks have discovered that a HELOC can be used as an “interest cancellation account”. It can be used to payoff the homeowner’s largest debt — the mortgage itself. A home is not an asset until its been paid off — it’s a liability.

    Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.

    And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.

    A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)

    And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.

    It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.

    I’d be happy to provide further details…

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