HELOC stands for a type of home equity line of credit. Unlike more typical home equity loans, with a HELOC not all of the money is given to the borrower. Once the credit limit is established, the borrower can utilize the HELOC as a credit card, withdrawing any desired amount provided that it does not exceed the total balance of the loan.
Different than credit cards, home equity loans are not utilized for everyday expenses and are saved for major events such as education, home improvements or medical expenses. With a home equity line of credit, the security for the loan is the borrower’s investment in his or her house and the financial institution agrees to a term in which the whole debt must be repaid.
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The interest rate on a HELOC is variable, unlike a conventional loan. The prime rate index is normally the determining factor for formulating the interest rate and it often does fluctuate over time. An additional important factor regarding the various ways lenders calculate the margin, is the difference between the prime rate and the interest rate the borrower will actually pay.
People in financial institutions consider a HELOC to be the same as a second mortgage. Due to the fact that about a decade ago the interest paid on a HELOC was deductible under both federal and a few state laws, they became very popular. HELOCs are also appealing since they offer flexible borrowing and repayment schedules.
Although a HELOC might be set up to have a minimum monthly payment obligation, which is normally interest only, the debtor can make a payment of any amount greater than the minimum requirement but less than the total balance due. During the “draw period” of a HELOC loan, which is usually between 5 and 25 years, assets can be withdrawn. The total drawn plus the interest constitutes the reimbursement payment on the loan.
The borrower’s house is the collateral with a home equity line of credit unlike conventional mortgages secured by non-recourse loans. Non-recourse loans carry no liability, but with a HELOC loan the borrower can be liable. A recourse debt in the case of a foreclosure proceeding can force a borrower to be personally responsible.
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