There are two very popular home equity loan products used by home owners to have access to some cash. The products or programs are known as home equity loan and Home Equity Line of Credit (HELOC) or simply Home Equity Line. There is a significant difference between home equity loan and HELOC. This article talks about the latter.
A home equity line of credit or heloc is like a credit card with your home used as collateral. The credit line will be assigned a predetermined amount or credit limit once it’s approved. The credit limit is calculated by the lender based on your home’s market value. For example, if your credit limit is set at $50,000; That means you could withdraw money up to $50K.
Many people use these loan programs for unforeseen emergencies or short-term financial help such as home improvements, finance a college education, paying off medical bills or even paying off other debts like your credit card debts.
Nowadays, most people would prefer a Home Equity Line of Credit over a home equity loan; this is because HELOC only charges you interest on the amount used (you don’t pay off the principal) as opposed to a home equity loan where you must pay interest on the entire loan for the full term.
When you’ve been approved with a HELOC, a “draw period” will be set (normally 5-10 years); You can withdraw money during this period as long as it is below your home equity credit limit. During the draw period, you make interest-only payments on the loan. After the draw period ends, the loan goes into a “repayment period” (normally 10-15 years). However, the lender could set its own draw and repayment periods.
If you apply for a home equity line of credit, make sure you check if the lender provides you with a credit card and special checks. This is for your convenience because there are lenders who don’t offer credit cards or special checks. Believe me, it’s a lot more convenient if the lender offers credit cards because you can manage and repay your loan via telephone or internet.
Another thing you need to be aware of is that there is an application fee for HELOC and this fee is not refundable if your application is denied. There are also other fees such as title search, attorney fees, taxes, and filing of mortgages. So make sure you do your homework and negotiate with your lender to lower or waive some of these costs.
Hope this short article is useful in helping you to understand the distinction between a home equity line of credit and home equity loan.