Home Equity Line of Credit (HELOC)
While you opt for loans based on your home-equity, you have two basic choices. The first choice is a fixed term and fixed amount called home equity loan (HEL). The other alternative is a line of credit secured by your home called Home Equity Line of Credit (HELOC). A HELOC is a revolving line of credit with a low, variable interest rate and a specified draw period. It is much like unsecured personal line of credit except the fact that HELOC is secured by second mortgage on your home. The line of credit can increase and decrease just like unsecured personal line of credit.
HELOC is different from HEL. Under HEL the loan amount is paid upfront and the repayment starts immediately. Whereas in case of HELOC, the consumer can typically draw on the line of credit for several years before the amortization period starts and consumer is required to begin repayment of principal. In most of the cases, the lenders terminate the line of credit after 10 years and you are required to repay the balance over the next 10 years.
Most banks, S&Ls, brokerage firms and credit unions offer it. HELOC is most suitable for consumers who want the peace of mind that comes from knowing that they have a financial resource available whenever they need it.
The major benefit of HELOC is that If you need it, you have it. If you don't need it, you don't have to use it." The fund availability is renewed automatically as you repay the money and you can use your line of credit over and over without reapplying. So it reduces botheration of applying again and again. The monthly payment usually varies from 1.5 percent to 2.5 percent of the outstanding balance.
The other benefit is the low interest rate of HELOC. As the rate of interest is lower than most other forms of revolving credit, you can save by consolidating your higher interest credits or loans. This is especially helpful for people with bad credit to reduce their cost of finance and improve their repayment history. Another benefit is that interest paid can be used for tax deduction purpose, if you itemize it carefully.
HELOC is ideal for financing outgoing expenses or major purchases. Such as preparation for a new baby, a wedding, a car purchase, childs education or home improvement. It helps you manage your finances and offer you greater control and flexibility. It allows you to tap maximum equity in your home. Typically, it allows you to tap up to 85% equity in your home. Some lenders are willing to offer even up to 125% of your home equity. It works much like unsecured personal line of credit and can be operated by writing checks or specially designed credit cards. Most of the HELOC have variable interest rate. There are few lenders who offer HELOC with fixed interest rate. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments.
The major disadvantage of HELOC is the temptation to go for long-term repayment schedules. This keeps the monthly payments low, but the purchased item has got life less than the total duration of HELOC. You still keep paying for the item, which you do not use anymore. The other disadvantage is that if you are not able to manage your expenses and are not able to repay the loan you home you are risking your biggest asset.
The cost of HELOC is similar to that in case of HEL. Other than interest rate, you may have to pay some fees for using HELOC. The type and the exact amount vary from lender to lender. Broadly you may be required to pay upfront closing costs such as application fee, attorney fees, title search, appraisal cost etc., continuing costs such as annual membership, participation costs, transaction fees etc and closing fees such as closure fees, early repayment fees, etc. The upfront closing costs for HELOC may be very low as most of the information required for HELOC might have been collected at the time of mortgage and may be readily available. You can also talk to the lender and negotiate with him to waive or bear some of these costs. Take into consideration all the costs while making a decision on HELOC.
There are options available for you to renew HELOC. However, you need to repay the entire amount you borrowed for the first time.
Is HELOC available to consumers with bad credit?Why not? HELOC is available for people with bad credit history. From other point of view it is an opportunity for people with bad credit history to improve their credit ratings. This is perfectly possible if you repay the HELOC within stipulated time. Things to watch out for are interest rate, and terms and conditions of repayment.
HELOC is growing in popularity. Consumers are using it effectively to finance their expenses. Many consumers, who have bad credit history, are using it to improve their credit rating. So what are you waiting for, go get it.