As far as borrowing against the home is concerned, home equity line credit (HELOC) is one of the most popular. HeLOC is very different as compared to a typical loan in that it operates the same way as a revolving debt position, that is, you can always borrow as you require collateralized against your home. Do you want to know whether this kind of financing suits you or not? The following is a guide of it.

What is a HELOC?

The home equity line of credit (HELOC) is a kind of lending that allows the owners of houses to take a loan based on equity accumulated on their houses. Equity is the amount your home sells at in the market minus the amount of money that you pay as a mortgage. For example, an individual with a house valued at $ 300,000 and a mortgage debt of $ 200,000 would have an equitable house value of $ 100,000.

With a HELOC, you gain access to a portion of that equity or with most of them, you can actually borrow up to 85 percent, and that lets you access funds with ease and freely to pay off any monster bills like your house repairs, education costs or even to clear your existing debts.

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How Does a HELOC Works?

A HELOC acts more like a credit card compared to a fixed loan. Rather than having a lump sum payment you are given a line of credit, the limit on a borrowing base. You are free to withdraw money as needed during the draw’s duration (normally 5-10 years). In this period, a good number of lenders demand interest payments only. The second phase starts right after the draw period and will include the repayment period, which can last 10-20 years, where you will have to repay the loan principal together with interest.

Advantages of a HELOC

Flexibility: Take out as much as you need as you need it.

Reduced Interest Rate: HELOCs are associated with a relatively low rate of interest as compared to personal loans or credit cards.

Tax Benefits: In certain situations, the interest charged on a HELOC can be deductible on a taxpayer’s return should he or she use the money to improve his or her home (check with a tax advisor).

Access to Large Sums:Good, especially for large projects or to consolidate a high-interest debt.

Risks of a HELOC

Variable Interest Rates: There is a possibility of the payment rising in case of raised rates.

Possibility of Foreclosure: As you secure your home as collateral, failure to pay the installment might make your home liable to foreclosure.

Overspending Temptation: Credits are readily available and that may add to the temptation to overspend.

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When to Consider a HELOC

A HELOC home equity line of credit can be intelligent when:

You should be able to access funds regularly between a project or costs.
You need a flexible option, such as a lump-sum home equity loan.
You can meet obligations wisely and pay your liabilities.

Final Thoughts

Home equity line credit (HELOC) is an effective financial instrument of the house owners, which provides the freedom of funds and the interest is low than any other types of loans. It should, however, be planned well and well repaid. Knowing more about the concept of HELOCs, their benefits, and their shortcomings, you will be able to understand whether this loan source may meet your financial needs or not.

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