HELOC's
How much money you can borrow through a HELOC depends on how much your house is worth and how much equity you have. Your equity is simply the difference between the current market price and how much you owe on it. If your house is worth $325,000 and your outstanding mortgage is $150,000, you have $175,000 in equity.
Having a lot of equity in your home is a good thing. But if you are faced with a sudden need for cash, having all that money tied up in the house won't do you much good.
HELOC stands for a home equity line of credit. A HELOC is a special type of loan that allows you to tap into the equity you have built up in your home without refinancing your entire mortgage. In other words, it's basically a second mortgage.
Enter the HELOC. Opening a HELOC allows you to access the equity in your home when you need an influx of cash. Maybe you need the money to fix your leaky roof or crumbling driveway. Or maybe your car died and you need a replacement. Another common use for HELOCs is debt consolidation. Because the interest rate on a HELOC is lower than rates of credit cards and other consumer debt, a HELOC can be an effective way to get yourself out of debt for good. Keep in mind however, that if you get in financial trouble again and are unable to make your payments you may lose your home.
The interest rate on your HELOC will be higher than the rate on your first mortgage. This is understandable since second mortgages are more risky from the lenders point of view.
The interest rate is also affected by the amount of equity you are cashing out. The more equity you leave in the home, the lower the rate.
There are as many different types of HELOCs as there are types of first mortgages. You can have a fixed interest rate or an adjustable rate. You can take the entire amount as a lump sum, or you take part as a lump sum and leave the rest as a line of credit. You may receive checks to write against your credit line and some lenders even offer ATM cards for automatic withdrawals.
Whatever your needs may be, there is a HELOC out there for you. Shop around as you would on a first mortgage and make sure you are getting the best deal possible.
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