Understanding Home Equity Lines Of Credit

Posted by: | Posted on: June 29, 2017

Home Equity

A business line of credit gives a business owner access to flexible capital that can be used to meet an assortment of business needs. It is like a credit card except you get cash and there is limit to the amount one can draw. By withdrawing funds from a business line of credit one can get more working capital. It can also be used to buy inventory, fill in a cash flow gap, take care of any other pending debts, or get an influx of cash in case of an emergency or opportunity. http://www.bankrate.com/ defines home equity lines of credit (HELOC) in a similar manner. It is a credit card that gives access to a revolving balance by mortgaging your home a second time. This amount can be used to pay college tuition or renovation and remodeling of the house.

A HELOC is also called a second mortgage as it is secured by the property, home, you own. The repayment time period is shorter than the primary mortgage that can range from 5 to 30 years with an average of 15 year period. Under a home equity line of credit one can borrow any amount with a set time period as long as it doesn’t go over a maximum amount. The idea is to withdraw only as much as is needed. Every time the principal is paid off, the credit can be used again.
To make things easier take this example: You take a $5,000 line of credit to pay off the tuition of your child. You borrow from this $5,000 only $2,000 to pay off the first installment of the tuition. At this point you owe the bank only $2,000 that you borrowed and still have $3,000 left in the credit line that you can borrow further. Now you can pay back the $2,000 you borrowed completely or part of it so that when the next tuition is due you have the whole $5,000 line of credit available to withdraw from.

There are a number of benefits of HELOC. The foremost being that they have a lower interest rate than some of the other types of loans. The second being the interest accrued is usually tax-deductible. Because one can replenish the amount in a HELOC the line of credit can be endless well. There is the flexibility to withdraw as much or as little as one wants throughout the draw period. The repayment period is long enough to comfortably pay off the loan. The draw period, generally, is ten years which is long enough to finish any big project that may require a cash influx. Because one can repay the principal, one saves on interest that will be charged during the draw period. By making additional principal payments, the overall debt can be reduced quickly.

A key point of home equity lines of credit is the flexible rate of interest that is charged on number of factors. The interest rate on the line of credit fluctuates over the entire life of the loan i.e. till it is completely paid off. Some of the factors involved are the period of loan whether draw or repayment and the amount owed.





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