What Is A Home Equity Line of Credit?
A Home Equity Line of Credit, or HELOC, is a form of credit extended while using your home as pledged collateral. A HELOC can have a fixed or variable interest rate and can be drawn upon at any time the borrower likes, similar to a credit card. In a sense, a HELOC resembles a credit card but usually has a much larger credit limit, a lower rate, and the interest paid is deductable (but please consult your tax advisor). These types of loans have much lower rates than credit cards simply because the home is used as collateral, which provides less underlying risk for the lender.
HELOCs are typically utilized once a borrower builds equity in his or her home, since there must actually be equity prior to a lender underwriting such a loan. They also allow you to draw funds at your convenience, but up to the predetermined credit limit.
One of the major advantages of HELOCs are their lower rates, when compared to other types of credit, such as credit cards. So often times, borrower will use funds from a HELOC to pay down high interest rate credit cards. Again, consult your financial advisor to see if this is financially beneficial. One-time expenses, such as buying a car or paying for a vacation, are often not recommended as proper uses of a HELOC.
What Does It Take to Qualify?
Similar to any other type of loan, a borrower must meet certain requirements with respect to credit history, employment, income, assets, debt-to-income ratios, as well as the property’s condition and value.
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