The facts about Home Equity Lines of Credit

When you are considering a home equity loan, or second mortgage, be sure to check out a home equity line of credit (HELOC). With this type of second mortgage, your lender sets a revolving credit limit determined primarily the amount of equity you have in your home. They’ll also set a time period during which you can tap the credit line.

The biggest advantage of a HELOC is that you borrow only what you need (only when you need it. You can access the funds either by writing a check or using a credit card associated with the account.

A HELOC’s interest rate is often a variable rate tied to an index. That means your monthly may vary, depending on the amount of your outstanding balance and the current interest rate. Sometimes HELOCs offer you a couple of repayment options. You may be able to make small interest-only payments or another small minimum payment with a balloon payment paying off the loan at the end of the term.

HELOCs are great if you need money over a period of time but don’t know how much you may need. Covering health expenses, business start-up costs or college are typical reasons for choosing a HELOC. You generally don’t have to pay points or finance charges on HELOCs as opposed to regular home equity loans.s

The overall cost of a HELOC varies widely depending up on the frequency of variable interest rate adjustments and any caps on rate increases. Find out if you have the option to convert the HELOC to a fixed-rate, fixed-term mortgage in the future, especially if a balloon payment is due at the end of the term.

When comparing a home equity line of credit to a home equity loan, don't rely solely on the annual percentage rate (APR) as a measure of cost, because the APR for a home equity loan takes points and financing charges into consideration while the APR for a home equity line of credit does not