Introduction
- A home equity loan is also known as "HELOC"
- A home equity line of credit is a loan in which a lender agrees to lend a maximum amount within a time period, where a security is the borrower's equity in his home like a second mortgage.
- A home equity line of credit is like a credit card because in home equity line of credit a borrower is allowed to borrow up to a certain limit by the lender for a specific time period.
- In home equity line of credit is more flexible than home equity loan.
- A home equity line of credit is a line of credit which is extended to a homeowner that uses a borrower's home as a security.
- Borrowers are pre-approved for a fixed spending limit based on income and credit record and may draw on this limit at their choice.
- An interest is charged at a pre-planned changed rate, which is normally based on current rate.
- If there is a balance owing on the loan an owner can select the repayment plan, as long as minimum interest payments are made monthly.
- The time period of HELOC can be between five years to twenty years and completing the period the remaining amount is to be paid fully.
- An interest is paid just on the real amount borrowed and it has no closing cost.
- A home equity line of credit is a line of credit secured by owner's home which gives you a revolving credit line to use for big expenses or to connect higher interest rate debt to other loans like credit cards.
- HELOC has a lower rate of interest as compared to other loans and an interest charged is generally deductible under income tax rules.
For example:
If Your house has an appraisal value of Rs 10,00,000 and home equity line of credit is available to 80% of value that is 8,00,000 and if you have borrowed Rs 5,00,000 so now you are only eligible to draw up to Rs 3,00,000 as a home equity line of credit.
How It Works:
- In home equity line of credit, a borrower set an amount with an interest rate and make equal payments for the whole loan term which may be from 5 to 30 years.
- In home equity line of credit, there are two parts
1) Draw period
- A period in which a borrower can draw an amount like for the first 10 years and once the draw period ends a borrower cannot borrow after that period.
- During the draw period, a borrower no need to make payments
2) Repayment period
- A period in which repayment of the loan amount is done like last 20 years. In repayment period, an amount becomes higher because it includes amount plus interest.
- At the end, if the amount becomes large enough and the borrower is not able to pay a loan amount. In this situation, a borrower becomes a defaulter and he can lose his home which is put as a security for a loan.
