Written by admin on May 3, 2009 – 9:06 pm
A common type of equity loan that homeowners take out when they need to finance something is the Home Equity Line of Credit, which is also commonly referred to as a HELOC. Many lending institutions offer this financing option for people who want the flexibility of a credit card type of account, which is “revolving,” and the lower interest rates of a loan based on equity in the home.
While a HELOC can be considered a type of home equity loan, it does have some unique features that make it a bit different. They also have some specific benefits that often make it the most attractive form of financing for people who have some equity in their homes.
Home equity is the value of the “unencumbered” portion of a homeowner’s property. In simple terms, it is the difference between the fair market value of your home and the balance of any mortgages that have been taken out against the home. If you have a home with a fair market value of $220,000 and the balance of all your mortgage loans is $120,000 in total, then you have a home equity value of $100,000 that you can borrow against to take out a home equity loan.
The equity in a property will build up in two different ways given sufficient time. The first way that equity increases is when the balance of any kind of equity loan, such as a mortgage or HELOC, is reduced through regular payments. The second way is through the appreciation of property values which can be quite substantial over the course of many years.
The unique thing about the HELOC type of home equity loan is that you can be approved to borrow up to the amount of equity in your home, but you are not required to take the amount out as a loan all at once. What this does is create a line of credit that you are able to draw against whenever the need arises.
The benefit of utilizing home equity loans is that you only pay interest on the portion of the equity line of credit that you have actually used. Many people take this approach when they borrow to do home improvements. Rather than taking out the whole $100,000 up front for improvements and being charged interest right away, many homeowners only pay for improvements as they are completed.
Other homeowners use a HELOC equity loan when they need to purchase a big ticket item such as a car or if they need to cover some type of emergency. This provides people with the flexibility that credit cards offer, but at a much lower interest rate because the loan is secured against the home.
Most lenders provide easy ways for homeowners to be able to use their home equity line of credit. Most provide a set of checks that can be used just like the checks attached to your checking account. Nowadays, many lenders also provide a debit card so their customers can easily access the funds.
On top of being able to take advantage of lower loan rates and the kind of convenience and flexibility that is provided through a HELOC equity loan, another benefit is that the interest paid on these loans is usually tax deductible as well. This is a great way to enjoy additional savings and it is what motivates some homeowners to only use a home equity line of credit any time they need to borrow money.