HELOC - Home Equity Lines of Credit

HELOC - An Excellent Financing Tool

A HELOC is basically a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount. It is secured by a mortgage or deed of trust on your property. You only pay interest on the amounts you borrow on the HELOC. If you don't use the line of credit, you don't have any monthly payments to make. You can access the HELOC by writing checks provided by the lender. In most cases, it will be a second lien on your property. This differs from standard loans because the borrower is not advanced the entire sum up front, but uses the line of credit to borrow sums totaling no more than the amount.

Home Equity Lines are Convenient for Funding Intermittent Needs

HELOCs can be used to consolidate debt, pay off credit cards, make home improvements, or pay college tuition. It can be used much more effectively by investors. When investors need cash in a hurry, a HELOC can be very useful. For example, if a seller says, "give me $80,000 cash on Friday and I'll sell you my house," investors can take advantage of a HELOC to finance their purchase.

Another example of cash in a hurry is a foreclosure auction, which, in many states, requires payment at the end of the day of the auction. When you need cash in a hurry, there's no time to go to the bank.

Things to Look for when considering a Home Equity Line Of Credit:

No HELOC application fee or at least the fee should be refunded at closing.
No home loan appraisal or closing costs
There are plenty of no-cost options available that you should not have to pay a HELOC appraisal fee.
No HELOC account maintenance or check-writing fees
Lenders already make money when you write checks (read - borrow) on the home equity credit line. If your lender tries this, get a new one!
No "usage" fees"
Apparently, HELOC lenders don't approve of the notion that a homeowner may want to have a HELOC as an emergency "reserve" account. Look for a lender that does not charge this type of fee.
Variable APR equal to or near the prime rate (adjusted quarterly).
Interest charged on the balanced borrowed should be the only cost involved with a good home equity credit line!
Periodic cap on interest rate changes (the amount that the rate can be changed at one time)
Look for a Home Equity Line of Credit that adjusts quarterly (rather than monthly) in increments of 0.5% or less.
Lifetime cap on rate increases (the amount that the rate can be adjusted over the loan's life)
You'll want to find a HELOC loan with a lifetime rate cap that you can live with. Ask your loan officer to clearly spell out the "worst case" scenario for HELOC rate increases!
Ability to convert to a fixed rate loan
When rates do rise, people often get skittish about their variable-rate debt. A useful feature to look for in a HELOC loan is the ability to convert the line of credit to a standard fixed-rate, fixed-term home equity loan.
Interest-only payments allowed
Get this option but only use it if you need to! It’s always best to pay down the principle, not just interest!
Unrestricted ability to repay principal without penalty
You should be able to pay off the Home Equity Line of Credit at any time without paying extra!