HELOC Advantages

Most borrowers might find it preferable if they could anticipate all their financial needs and take care of them with one loan for a fixed lump sum. However, this isn’t always the case. Borrowers who may have intermittent financial needs, such as paying college tuition or making period home repairs or improvements, are prime candidates for a home equity line of credit, or HELOC.

A HELOC is considered a mortgage, because it is secured by the equity in your home. However, unlike other mortgages, it is set up as a revolving line of credit, with a maximum withdrawal amount. Borrowers can get cash out of the loan at any time they need it, usually through writing a check or using a special credit card.

Obviously, the primary advantage of a HELOC is its revolving nature. HELOCs have a draw period, typically five to ten years, where the borrower can draw on his line of credit, and only has to repay the interest each month.

There is then a repayment period, usually of ten to twenty years, in which the loan is fully repaid. Some HELOCs require full repayment at the end of the draw period, necessitating a refinance, usually to a fixed rate loan.

Another advantage of a HELOC is low upfront costs. For example, consider a loan of $150,000. A standard loan for this amount would likely have settlement costs ranging from two to five thousand dollars. For a HELOC of the same amount, it would be highly unlikely that settlement costs would exceed one thousand dollars.

Also, relatively advantageous to HELOC is the standard used to calculate its interest rate. All HELOCs feature adjustable rates whereby their interest rates are tied to the prime rate. Many consider the prime rate to be much more stable than the indexes used to calculate rates for standard adjustable rate mortgages.

It is important to remember that while the prime rate is fairly steady now, in the past it has undergone large fluctuations, as well.