A home loan which enables you to borrow money against your home on an as-needed basis. Your home is used as the collateral. The homeowner can draw on their line of credit at their own discretion once the maximum loan amount has been determined. Interest payable is established with a predetermined variable interest rate which, in most cases, is based on the current market interest rate.
The amount of money you qualify to borrow is decided from the appraised value of your home. Home owners can borrow and make monthly payments on their mortgage, as long as the amount repaid each month covers at least the interest on the borrowed total.
HELOC is similar to a credit card with a high credit limit and a very low interest rate. Since it is based on your home’s value, lenders are always willing to offer even lower interest rates than those of standard credit card companies. You also have a higher borrowing capacity because you can qualify for a loan of up to 80% of your home’s appraised value.
Example of HELOC
Appraised Home Value $300,000
80% of Appraised Value $240,000
Less Amount Owed on Mortgage $120,000
Amount Available to Borrow $120,000
In the example above, the homeowner can borrow up to $120,000. It is also important to note that lenders may consider the homeowner’s credit history, current debts and income level. These can significantly reduce the actual amount you can qualify for. You should also note that HELOCs have a variable rate of interest, not fixed, making them vulnerable to economic depressions and interest hikes.
But a home equity line of credit has several benefits. First, you have the option of borrowing as much as you require and whenever you need the money. You can opt to borrow smaller amounts rather than borrowing a huge amount at once so that you can take advantage of lower interest rates. People often take advantage of HELOC and use it to assist in financing higher education, purchasing a car, or consolidating other bills.