Posted on: 18th May, 2006 09:49 pm
If you're thinking about ways to tap your financial resources, you'll find that utilizing your home equity is often a viable option. Your home equity is the current value of your home minus the money you owe on the mortgage. A simple way to get the most out of your equity if you're in a financial crunch is to take out home equity line of credit, which is a kind of second mortgage.
A Home equity line of credit (HELOC) gives you the opportunity to fulfill your financial needs using your home equity as security for a loan. For buyers that don't have any money for down payment, a home equity line of credit is a good option. With a line of credit, you never borrow beyond a certain credit limit, which helps you to manage your debts better.
How a HELOC works
A home equity line of credit works like a credit card where you can withdraw cash up to a predetermined limit any time within the draw period. It's easy to access the funds in a HELOC by writing a check, using a credit card, or by using a debit card that accesses the line of credit.
When you take advantage of a HELOC, you are required to make a minimum monthly payment that covers the interest. But you can also pay down the principal so that your debts are cleared and you can withdraw funds again if the draw period isn't over.
Once the draw period ends, you can ask for a renewal or you can no longer access the cash once the draw period expires. The repayment period starts once the draw period has expired and the HELOC takes the form of an adjustable rate mortgage (ARM) that requires you to pay down the loan in regular installments.
In most cases, you have a draw period of 5 to 10 years, after which the repayment period is typically 10 to 15 years. There are lenders who offer HELOCs with no fixed terms for withdrawal and repayment of loan; you can carry on with the loan until you sell the property.
Here's an example on how a HELOC works:
Suppose you have a line of credit of $10,000.
You borrow $6,000 in order to pay for a kitchen remodel.
You owe the $6,000 you've already taken and the remaining credit available is $4,000.
If you pay back $2,000, you still owe $4,000.
So, you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.
When you take advantage of a HELOC, you are required to make a minimum monthly payment that covers the interest. But you can also pay down the principal so that your debts are cleared and you can withdraw funds again if the draw period isn't over.
Once the draw period ends, you can ask for a renewal or you can no longer access the cash once the draw period expires. The repayment period starts once the draw period has expired and the HELOC takes the form of an adjustable rate mortgage (ARM) that requires you to pay down the loan in regular installments.
In most cases, you have a draw period of 5 to 10 years, after which the repayment period is typically 10 to 15 years. There are lenders who offer HELOCs with no fixed terms for withdrawal and repayment of loan; you can carry on with the loan until you sell the property.
Here's an example on how a HELOC works:
Suppose you have a line of credit of $10,000.
You borrow $6,000 in order to pay for a kitchen remodel.
You owe the $6,000 you've already taken and the remaining credit available is $4,000.
If you pay back $2,000, you still owe $4,000.
So, you have $6,000 ($4,000 + $2,000 = $6,000) in available credit.
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