A home equity line of credit, short-named for a HELOC, is a line of credit using a certain percentage of the home equity to offer the borrower a revolving credit line for large expenses or to help the borrower consolidate the debt of higher interest rate on other loans. HELOCs often have lower interest rates compared with other types of loans and the interest usually can be tax deductible.
If you take a home equity line of credit, you can borrow against the available equity in the house and the property will be used as the collateral for the credit line.
You can borrow the money up to a certain credit limit. The interest will be charged on the amount you borrow. Like a credit card, HELOCs allow you to make monthly and minimum payments.
HELOCs generally have two periods: the draw period and the repayment period. During the draw period, which usually lasts for 5-10 years, you are allowed to borrow any amount of the fund according to you need as long as the amount is within the limit. Once the draw period is over, the repayment period starts during which you are required to make regular payments of both the principal and interest until the loan is paid off. This period usually lasts 10-20 years.
Advantages of HELOCs
As is mentioned, the interest rates are relatively lower than other types of loans, especially the home equity loan. The interest will be charged only when you take out the fund. Besides, once you repay the outstanding balance, the amount of available credit can be replenished. This also helps increase your credit score.
Disadvantages of HELOCs
If you choose a variable interest rate, the home equity line of credit is similar to an adjustable mortgage, which means the interest rate can go up or down with the change of the market. This makes budgeting and planning difficult. In addition, if you fail to repay the money, you are likely to face foreclosure proceedings while overspending is not uncommon.