HELOC stands for “Home Equity Line of Credit”. A HELOC is a special type of loan that allows you to tap into the equity you have built up in your home without refinancing your entire mortgage. In other words.. it is basically a second mortgage.
How much money you can borrow through a HELOC depends upon how much your house is worth and how much equity you have. Your residual value is simply the difference between the current market price and how much you owe on it. If your house is worth $325,000 and your mortgage balance is $150,000, you have $175,000 in equity.
To have a lot of equity in your home is a good thing. But, if you are faced with a sudden need for cash, having all that money tied up in your home won’t do you much good.
Enter the HELOC. Opening a HELOC allows you to access the equity in your home when you need an influx of cash. Maybe you need the money to fix your leaky roof or crumbling driveway. Or maybe your car died and you need a replacement.
An additional purpose for a HELOC is often debt consolidation. Because the interest rate on a HELOC is lower than rates on credit cards and other consumer debt, a HELOC can be an effective way to get yourself out of debt for good. Keep in mind however, that if you face monetary difficulties again and are unable to make your house payments you could lose your home.
The HELOC interest rates will be greater than the rate on your first home loan. This is understandable since second mortgages are more risky from the lenders point of view.
The interest rate is also affected by the residual value you are cashing out. The more equity you have in your home, the lower the interest rate will be.
There are as many different types of HELOCs as there are types of first mortgages. You can have a fixed interest rate or an adjustable rate. You can take the entire amount as a lump sum, or you take part as a lump sum and leave the rest as a line of credit. You may receive checks to write against your credit line and some lenders even offer ATM cards for automatic withdrawals.
Whatever your needs may be, there is a HELOC out there for you. Shop around as you would on a first mortgage and make sure you are getting the best deal possible.
Article Courtesy of Home Loan Application Center