A home equity line of credit (commonly abbreviated to a HELOC) is a loan where the lender agrees to lend a maximum amount within an agreed period (term), where the collateral may be the borrower?s equity in their house. Due to the fact that a home often is often a consumer?s best asset, homeowners use home equity a line of credit just for major items, for example education, renovations, or medical bills, and do not use them for day-to-day expenses. HELOC abuse is often cited as one reason for the subprime mortgage crisis.
A HELOC differs from a regular home equity loan because the borrower just is not advanced the entire sum up front, but utilizes a personal credit line to gain access to sums that total a maximum of the credit limit, such as a charge card. HELOC funds may be borrowed in the draw period (commonly 5 to 25 years). Repayment is in the amount drawn plus interest. A HELOC will have a minimum monthly payment requirement (often ?interest only?) however, the debtor may make a repayment of any amount as long as it?s greater than the minimum payment (but lower than the entire outstanding). The full principal amount is due after the draw period, either as being a lump-sum balloon payment or as outlined by that loan amortization schedule.
Another critical difference from a conventional loan is that the interest rate on the HELOC is variable. Interest rates are generally determined by an index, like the prime rate. Because of this, a person?s rate may increase or decrease with time. Homeowners buying a HELOC must be aware that all lenders calculate the margin the same way. The margin is the distinction between the prime rate and also the interest rate the borrower will be paying.
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Source: http://www.knowfinance.com/home-equity-line-of-credit/
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