HELOC refers to home equity lines of credit. You can get a loan using your home as security. While many people tend to do it, there is still very little knowledge about HELOC. The moment you buy a home, it continues to depreciate. You can make use of any proceeds on home improvement or any other projects you want to undertake.
On the other hand, you may be in dire need of some financial bailout. Using your home to secure a loan might be your last option. Here are four things you should know about HELOC.
1) The Loan Must Not Exceed Equity
The bank needs some guarantee that they will get their money back in case you are unable to pay off the mortgage. Therefore, they will make sure that they do not give you a loan exceeding the total cost of your home. The banks calculate the loan amount you are eligible for using a precise formula. They will take your existing loans and add the amount they intend to give and then divide that total with the total cost of your home. You can quickly get a glimpse of the best HELOC rates and fees by using a reputable platform like My Bank Tracker.
2) You Have Two Choices
A HELOC is one of the options you get asides using the home to get a loan. The lines of credit loans are different from the home credit. The lines of credit involve small available amounts of money that you can withdraw over a set period. You get a fixed period (known as the draw period) when you can make withdrawals. During that time, you do not have to pay anything except an annual fee. The rest will be repaid after the draw period lapses.
3) It Adds up As a Mortgage
Securing lines of credit is also like mortgaging your home. In case you lax on payment, you can lose your home to the bank. That makes it similar to a mortgage that you can use to your advantage. The federal law allows you to get up to $100,000 for the deductible tax. The amount is for married couples. Single persons can get half of the amount. You can save up the interest money that you should be paying on loan.
4) The Risks
We have already established that there are risks involved while taking loans on your home. In case you lose your job and are unable to pay off the debt, you can lose your home. Too much borrowing can be harmful especially where the loans exceed the amount your home is worth. That means, even when you sell your home, you cannot cover the loans.
5) HELOC Has Higher Rates Than Mortgages
While we consider the HELOC as a mortgage, it has a higher price. The fact that you have already mortgaged the home leaves very little value on the home. In case they sell the house, they will give the full amount to the first lender. Thus, the amount of interest secures the second lender when they need their money back.