A home equity line of credit (called a HELOC) is very different from a home equity loan. For the right person, a HELOC can offer many advantages over a home equity loan. Before you can decide if a HELOC is right for you, you must first understand the difference between these two loans, what advantages a HELOC has to offer and how you can make a HELOC work for you.
What's the difference between a home equity line of credit and a home equity loan?
A home equity loan is a fixed amount borrowed against the value of your house. Once the amount has been awarded, no more withdrawals can be made on that loan. Repayments on a home equity loan are fixed throughout the life of the loan.
A home equity line of credit is a more dynamic loan that changes with time. The line of credit awarded may be very high, but you don't have to use the full amount. Instead, you make withdrawals as you make purchases. In this way, the HELOC functions more like a credit card. The interest rate on a HELOC is usually variable. As the principal gets paid off, that amount becomes available to be borrowed again.
Why would a person want a HELOC instead of a home equity loan?
A HELOC is convenient. It can be used as needed without requiring you to apply for a new loan every time money is desired. HELOCs also allow you to limit your spending by giving you the power to choose when you borrow and how much you borrow, instead of awarding you a fixed amount.
Compared to a home equity loan, a HELOC enables you to borrow only what you really need.
What are the disadvantages of a HELOC?
The fixed amount of a home equity loan makes it very predictable. You'll know when you borrow the money how much you'll borrow and how long it will take to pay back. A HELOC is more unpredictable because the payment amounts depend on how much you decide to spend and when you decide to spend it. The variable interest rate and complex rules of a HELOC makes it difficult for homeowners to make decisions that will be to their advantage.
How can you make a HELOC work for you?
The ease with which people can borrow money using their home equity line of credit makes a HELOC a dangerous tool. It helps to own line of credit software that will show you if-then scenarios and tell you how you can offset account balances to pay off the loan more quickly. Knowing how you can pay off your HELOC without allowing the loan to become unmanageable makes it a safer investment.
For more information, contact a reputable company that offers line of credit software.
