What is Home Equity Credit Line of Credit (HELOC), whst is the advantage and disadvantage of that?

What is Home Equity Credit Line of Credit (HELOC), whst is the advantage and disadvantage of that?

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  • 1 decade ago
    Favorite Answer

    A Home Equity Line of Credit is a line of credit based on the precentage of your home you have already paid for. For Ex. you have a loan for $100,000 and you have paid 30,000 of it off and owe $70,000 still. The equity would be the $30,000 that you own. YOu could then take line of credit out on the $30,000 that you own. HELOC interest rates are based on the prime rate on Wall Street posted each month, which means that it changes monthly. Prime right now is on the rise. Recently it has been at 7.75% for the last couple of months and now it is at 8%. The prime rate is then added to what is called the Margin. Your margin is based on you FICO(credit score). The better credit you have the better margin you will have. I have even seen negative margins on some loans. So for example lets say you have a 2% margin and then prime rate is 8%. Your HELOC would then have a 10% interest rate. This is pretty high, but lower than most peoples credit card interest rate. Let's say you have 10,000 in credit card debt and the average interest rate on the collection of cards is 22%. It would be a good decision to take out a HELOC and then use that money to pay off your debt on the credit cards. You would save because of the interest rate. HELOC's have a cap rate of 18% so that would still be lower than the 22%. Unfortunately the down side of this is that the interest rate changes monthly, as well as the payment amount. There are all different kinds of HELOC/2nd mortgages you can get. Some are No Cost HELOC's and don't require you to pay closing costs, but the fine print says you cannot pay the loan off or refinance within a certain time period. Also watch out for prepayment penalties or termination fees. These usually only last for 6 months, but make sure read all the fine print! Also sometimes there is an account maintenance fee that is waived only if you never make a late payment within the first year. If you do miss a payment in the first year you end up paying a maintenance fee yearly for the life of the loan, after the first year you don't have to worry about being late except paying the late charge. You really should try a fixed rate 2nd mortgage right now instead of a HELOC since interest rates are on the rise.

    Source(s): Countrywide Employee Training Program
  • 1 decade ago

    I don't see many disadvantages. Its a tax deduction and it is a flexible line of credit. You just have to be smart with it. I know a few people that have one, and have used it as a constant source of funds to pay off their credit cards, and then they repeat the process, and they are never able to pay the home equity line down.

  • Jill W
    Lv 4
    1 decade ago

    It is taking a loan out against the amount of your home you own. the downside is that you risk your home if you default on the loan. the advantage is that it is usually lower interest rate than a personal line of credit.

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