Getting a home equity line of credit is a great way to get access to the equity in your home. In fact, it may be the best way to use that equity - unless you know you have need of all of the money that is available. Here are some of the advantages that you can have with a home equity line of credit mortgage.
First Advantage - Get The Money As You Need It
With any other kind of loan, you will get a lump sum. Your interest rates and payments are set. There are no options. With a HELOC, however, you are given a line of credit and a credit card or checking account that gives you access to the funds. You do not have to use all of it, if you don't want to. This is especially good if you know that you need some money, but really are not sure just how much.
This kind of flexibility is great, because you are given a draw period in which you can get more money when you need it. This draw period can be up to 11 years. The truth is, who knows what kind of funds you may need in the next 11 years, or so? This gives you access to sufficient money as you need it and for projects - as they come up.
Second Advantage - Pay Interest Only On Money Used
A home equity line of credit only charges you interest on the money that is drawn out of the account. You are not being charged for money that is sitting idle - as it might with other types of loans. With those loans, you are paying interest on the full amount - whether you are using the money or not.
Third Advantage - Lower Interest Rate
The interest on a home equity loan is usually lower than other types of second mortgages. Usually it is just about two percent above the prime rate.
Fourth Advantage - Possibly No Closing Costs
Most HELOC's have no closing costs! This certainly makes it the loan of choice, and it can save you a lot of money by not having these charges added to the loan. Some lenders will charge you closing costs, so this should be a good incentive to find one that does not. It will result in considerable savings at closing time.
Fifth Advantage - Tax Deductible
The interest that you are charged each year in a HELOC is tax deductible. Ultimately, this brings the actual interest rate down lower and means an even greater savings.
Some lenders may even use a home equity line of credit on top of an 80% first mortgage in order to eliminate the Private Mortgage Insurance. The way it is done is to get the first mortgage, pay your downpayment, and then get the HELOC for the balance. Make sure you also have enough for the closing costs at settlement, too.
A home equity line of credit can come with a number of other fees and charges. Some will charge a monthly fee or an annual one (or both), and others may charge you if you let the money sit too long without using it. These charges can be avoided if you shop around for the best deal. A HELOC is an adjustable rate loan with few caps (if any) in place. Some of these will come with guarantees of convertibility to a fixed rate loan if the interest rates get too high. Also, be sure to look for any penalties that you may incur if you pay the loan off early.
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