Learn More About What is a HELOC and How Does It Work
Do you need some financial help but don’t want to go with the standard loan or mortgage? You’re in luck because that’s not your only option; you can also get a HELOC. However, you may be asking what is a Heloc and how does it work, right? This article right here is the answer to your question. You will not only learn more about what is a HELOC and how does it work, but also about how you can use it to your advantage and get the help you need.
What is a HELOC and How Does It Work
We begin answering the question of what is a HELOC and how does it work by determining what HELOC stands for, which is home equity line of credit, often simply called home line of equity. What is it though? Basically, it is a loan that has been set up as a line of credit; instead of a fixed dollar amount given at a fixed time, the lender lends you a maximum amount within an agreed time period, which is called a term. The borrower’s equity in their house is the collateral in this case, which makes it equivalent to a second mortgage.
If you’re still not clear about what is a HELOC and how does it work, maybe an example would help clear it up further for you. So, imagine that you want to borrow $10,000. Now, with a standard loan, you’ll be given the whole amount at once and you’ll have to pay it back in its entirety when the loan term ends. In contrast, a HELOC is when a lender promises to advance you up to the $10,000, where you choose both the amount and time. How do you draw on this line of credit? By using a special credit card, by writing a check, or by any other method the lender provides.
Advantages and Risks of HELOC
HELOC’s are a great way for you to fund your intermittent needs, for example if you need help with college tuition, with your home improvement, or to pay off your credit card debt. The best thing about this is, that you only draw the amount you need at that time, and so you only pay interest on that amount. Similarly, there are low upfront costs.
However, there are some risks to consider as well; the biggest one being that of the interest rate. Since HELOCs are adjustable rate mortgages (ARMs), the rate can be affected by market changes.