What is a Home Equity Line of Credit (HELOC)?
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For most people, their most valuable asset and their biggest investment is their home. The home may be worth a lot of money when they are ready to sell for retirement or for investing in a new home. However, until then, the home is not considered liquid. You can't rely on that asset when you run into money problems and need fast cash.
However, with a home equity line of credit, or HELOC, you can. A home equity line of credit allows you to borrow against the equity you have in your home, or the amount of principal you have already paid off. Therefore, if you have built up $10,000 in equity, you may be able to borrow up to $10,000 for your HELOC.
A home equity line of credit is sometimes referred to as a second mortgage because it is granted against the collateral of your home. Unlike a traditional home equity loan, the line of credit is an open account from which you can borrow money at any time you like. A traditional home equity loan grants you a lump sum that you have to pay back in installments. You cannot borrow more once the loan is paid unless you apply for and open up a new loan.
In contrast, a HELOC is more like a credit card. You are approved for a certain amount of credit based on the equity of your home, and you can borrow as much as you like while the line of credit is open. You can borrow the full amount for a home renovation or other major purchase, or you can borrow smaller amounts as needed for home repairs. You will make a monthly payment on the HELOC, just as you would with a credit card.
A home equity line of credit is a good option for debt consolidation. Typically, the interest rates are lower on a HELOC than credit cards and sometimes even on traditional home loans. You can use the money from your home equity line of credit to pay off higher interest debts and get a better handle on your monthly finances.
You can also use a home equity line of credit to pay for major items such as your child's college education, a new car, or even a wedding.
To find the best rates on a home equity loan or line of credit, you will need to shop around with different lenders. Market conditions, the amount of equity in your home and the quality of your credit report will all have a major impact on the kind of rates you can get, which will also impact how much you pay back each month.
Do everything you can to get your credit in top shape before you apply for the line of credit, including paying off whatever debts you can. Also wait until overall rates are lower to help you get the very lowest rates.