Much like a Reverse Mortgage or Second Mortgage, a HELOC gives homeowners the ability to convert their home equity into cash.
A HELOC is a line of credit secured by the equity in your home. Homeowners can choose when to use the funds, and there are repayments due according to a schedule in the contract. It functions as a revolving line of credit, similar to a credit card with large limits.
Some people find themselves interested in a HELOC if they have a large balloon payment due on a loan, perhaps even their home mortgage loan. They are also sometimes used as a debt consolidation tool to pay off credit cards and other outstanding debts (but, for this, fixed-rate home equity loans are more popular).
The existing equity in the home can be used to generate the liquidity they need to pay the balloon payment. This, of course, comes with the risk that the HELOC will not be repaid on time, and that the ownership of the home will be put in jeopardy.
HELOCs typically have a term in which they are available of between 5 and 15 years, and individuals may be approved for a line up credit up to 85% of their existing home equity. HELOCs generally come with a variable loan interest rate, and there may be a few stipulations about the minimum amount that must be kept outstanding, or minimum withdrawal amounts, and so forth.
These are different from home equity loans, which are one-time lump sum loans, which usually have a fixed repayment schedule, sometimes used for debt consolidation, as mentioned above, due to their favorable interest rate when compared to credit card debt.
HELOCs, on the other hand, can be dipped into over and over again, up to the limits, for liquidity needs such as paying for a child’s college tuition year after year, and other recurring needs.
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