What's a heloc ?

 

Heloc is the acronym for home equity line of credit. It really isn’t a difficult mortgage concept to grasp. You can actually think of it as a credit card account set up with your lender to draw on the equity you have in your property. For this reason they are most commonly used as a second mortgage.  However, unlike a second mortgage where you get your money 3 days after closing, with a heloc you don’t get the funds.  You get the promise of the lender to advance you up to a certain amount of money in the future.

This promise to pay dynamic, offers a number of advantages over a typical second mortgage. 

 

Major Advantage of a heloc…..

Is your offered a line of credit that gives you access to the money. There’s no requirement to use any of it, if you don't want to. This can particularly beneficial if you have a need to access funds without a requirement for any particular amount. This sort of flexibility allows you access to funds when the need arises. The draw period is usually limited to 10 years. When viewed with the concept that it is always best to borrow when you don’t have a need, presents the perfect situation for a heloc . Allowing you access to money as you your needs arise.

Pay Interest just On the Money you Use

A heloc only accrues interest on funds that are drawn out of the account. You're not paying interest on money that's sitting idle. Why pay interest on money you’re not using?

 

Major Disadvantage of a heloc......

In my opinion, at the present time, the biggest disadvantage of a heloc is that they are adjustable rate loans with the added unattractiveness of no caps that can limit your exposure to rate increases. This is almost insurmountable with today’s low fixed rates if you have an immediate need for money without the ability to repay it quickly. Keep in mind that there can be any number of fees that are associated with home equity lines of credit. Some lenders charge a monthly or annual maintenance fee. Some charge a fee if the money sits and doesn't get used. You can avoid many of these charges if you shop around. A few offers the ability to convert to a fixed rate loan if the rates of interest get too high but with the rate atmosphere today this may be an non-issue  trade off. Next post we'll look at the heloc rate.