How Does a Home Equity Line Of Credit Work?


A home equity line of credit, also known as HELOC, is a line of credit secured by your house that enables you to get a revolving credit line. This could be used for large expenses like house renovation, to repay debt, or for other purposes.

The interest rate in the home equity line of credit is comparatively lower as compared to other forms of loan. Moreover, the interest may be tax-deductible.

How a HELOC Works

Home equity line of credit allows you to borrow cash against the available equity in your home, this property is used as collateral for the line of credit. It resembles much with a credit card, as repayment of the outstanding balance is immediately followed by replenishment of the available credit.

This means that you can borrow again according to your need. You are allowed to borrow as little or as much as you want to.

However, this is possible only throughout the draw period (typically 10 years). This is also because at the end of the draw period a 20 year repayment period starts.

Qualifying for a HELOC

Following criteria need to be fulfilled for qualifying for a HELOC:

  • Availability of equity in your home. i.e, the amount you owe for your home must be less than the value of your home.
  • The borrowed amount needs to be almost 85% of the value of your home minus the amount you owe.
  • Clear history related to your credit score, employment, and monthly debts.

Types of Lines of Credit

There are two types of lines of credit (LOC) that a bank offers. These are secured and unsecured. Both lines of credit offer variable rates or fixed interest rates.

  • The unsecured lines of credit don’t demand collateral. They usually consist of small limits and higher monthly payments. This type of line of credit can also cause a high interest rate.
  • The secured LOC uses your home as collateral. They are most often referred to as a HELOC or (home equity line of credit). Since it uses the home as collateral, the interest rate applied is low comparatively. Therefore, coming up with low-interest rates, higher credit limits, and a lower monthly minimum payment.

Comparing both, secured LOCs give more flexibility to a home equity loan and are the way to go if you need to borrow money for debt consolidation.

Advantages of HELOC

Reliable ways of borrowing money are very crucial these days. With the sudden outbreak of Covid-19, followed by job closure and lockdown, access to a credit line can be the only way out for you.

A home equity line of credit is a great option for a homeowner, drowning in debts. They are the cheapest alternative available as compared to personal lines of credit or unsecured loans.

The most beneficial point of a home equity line of credit is that you are only charged with what you owe as well as you will only pay the monthly interest that has built up.

Here are the most prominent advantages of HELOC:

  • Flexible and cost-effective as compared to rigid personal loan
  • Get lump sum cash for home renovation
  • Consolidate high-interest loans
  • Covers Education expenses
  • Helps you tackle unexpected expenses
  • Can be monitored via online banking apps
  • Allow you to reuse the amount you have paid down at any time

A home equity line of credit is one of the best options to borrow money for homeowners. The only challenge with HELOC is figuring ways to secure it, especially when you have bad credit.

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