A home equity line of credit is a line of credit in which your home is the collateral. Most of these lines of credit come with an adjustable interest rate over a 10-year period and the borrower just has to pay interest. This lets borrowers have access to much-needed funds. Once the loan period ends, the remaining or outstanding balance has to be repaid. Homeowners can qualify for such loans if they have enough money to meet their debt obligations. This type of financing lets people borrow up to 90% of the combined loan to value.
Why this loan is useful
Finance gurus at wasatchpeaks.com say this type of a loan is a good way to get a short-term loan. It is very tempting to access this kind of a loan even if it is not really needed. Some factors to consider before applying for such a loan are:
- What long-term goals do you have?
- What are you going to use this money for?
Like mortgages, these loans let you borrow specific amounts against the equity in a home for a specified period. Interest rates can be fixed or variable. Keep in mind that HELOC loans have 2 stages – the first one lasts about 10 years and only interest is paid. In the second stage, borrowers have to start paying the principal and interest as well. If a large sum has been taken as a loan, payments will go up substantially. At this point, refinancing is the only thing to do, if one cannot pay off what is owed.
Ways to refinance a loan
If borrowers want to have some cushion on their loan, here are 3 ways to do it.
- Refinancing: When one refinances a home equity loan, they get a new HELOC with interest only payments. This still offers access to lines of credit which will help to meet any need. The balance is still due.
- Rolling 1st mortgage and HELOC into one: The third option is to roll a mortgage and HELOC loan into one. This will result in a good interest rate over 15 or 20 years and reduction in the total payment amount.
It is a good idea to take advantage of low-interest rates – but closing costs could be high. Do the math before refinancing – banks usually do a credit check before going forward with refinancing.