HELOC

A home equity line of credit, or HELOC, is an extremely popular source of borrowing for homeowners, and rightly so. Like a home equity loan, it is often referred to as a second mortgage. Unlike a home equity loan (HEL), however, which is a closed-ended loan distributed in one lump sum, a HELOC is an open-ended line of credit, meaning you can borrow as much or as little as you want, knowing it will always be there for you if the need arises. In contrast to home equity loans, a HELOC is best utilized for ongoing expenses. A HELOC is best served for financing needs such as higher education, large medical expenses, and personal business costs.

Advantages of a HELOC

• A HELOC is considered the lowest-cost option for borrowing money, and for this reason it is highly regarded.
• A HELOC is open-ended, meaning you do not have to borrow one large sum of money if you do not need it. It can serve as a form of insurance policy in case unexpected expenses arise.
• A home equity line of credit does not have a set interest rate. Instead, the interest rate is fixed to the prime rate.
• You can defer payment of a HELOC for up to 10 years. After that period, you begin repaying the principal.
• Your payments are not fixed like in a home equity loan. When utilizing a HELOC, your payment fluctuates depending on the amount borrowed.

Disadvantages of a HELOC

• As with most other loans, borrowers often get caught up and do not plan repayment accordingly, leading to more debt.
• In order to take out a home equity line of credit, you must put up your home as collateral.
• A HELOC often includes a balloon payment, or large final payment on the loan.

When weighing out the pros and cons, a HELOC is still considered perhaps the best way to borrow money. Because of its low interest rate, a home equity line of credit can be beneficial in consolidating your other loans into one payment with a lower interest rate. For this reason, it can also help people get their credit score back in order and improve bad credit.

If you have bad credit, a HELOC is one of the best lending solutions you can make use of. Because you are putting your home up as equity, lenders are much more willing to issue a HELOC than any type of unsecured loan, knowing they have collateral in case of a default.

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