A HELOC is an acronym standing for Home Equity Line of Credit.
HELOC’s can be the only loan against your home or they can come in the form of a second mortgage, sitting behind a traditional first mortgage on title. A HELOC behaves just like a personal line of credit in that you may withdraw up to the amount approved for the HELOC and you repay only the amount you actually use. Generally, a homebuyer will need at least 20% of equity in a home to obtain a HELOC.
Mr. McGillicuddy owns a home worth $200,000 and owes $120,000 against the home. Mr. McGillicuddy has $80,000 in equity. Based upon his current financial situation and credit rating, the bank or financial company might be willing to loan $20,000 as a HELOC.
Mr. McGillicuddy may take the $20,000 at once, or may take the $20,000 in payments as needed, or may only take a portion of the line of credit given. Mr. McGillicuddy will repay only the amount withdrawn from the HELOC.
Advantages of a HELOC
There are many advantages of taking a HELOC. First, the interest rates of a HELOC are usually substantially lower than taking a personal loan or using a credit card for a large purpose. If a HELOC is obtained to consolidate debt, the lower interest rate will mean lower monthly payments than a credit card, and a longer period of time to repay the money borrowed.
In addition, the funds used for a HELOC do not need to be used for the home. They may be used for things like vacations, furnishings, even for tuition for a child’s education. A HELOC can also be used to pay off a high interest personal loan, car loan or credit card.
Also, HELOC’s can be paid down or off completely at any time, without penalty – this makes it a great product for clients who have the ability to make regular extra payments or have short term plans to pay their mortgage off entirely.
A HELOC is great tools for investing, particularly when they are used as part of the Smith Manoeuvre.
Disadvantages of a HELOC
Typically, you are only required to make interest payments each month on the loan, so when a HELOC is the first and only mortgage against your home, there is a risk that the loan may never actually be paid off. There are however, several HELOC products available that can be divided into various types of loans including a traditional type of mortgage that requires both principle and interest payments.
When a HELOC is used as a second mortgage, you are reducing the equity available in your home. Care should be used in taking a HELOC to insure that you are financially capable of making 2 mortgage payments over a long period of time. Additionally, there may be higher initial costs in securing a HELOC, and some closing costs may apply, since you are taking a second mortgage.
At First Foundation, we are able to obtain first place, HELOC products that can be tailor made to fit your financial needs. If you are interested in consolidating your current consumer debt or investing the equity in your home through the Smith Maneuver, a HELOC may be the right choice for you.
If you are interested in learning more about HELOC, please feel free to contact us today!