What is a HELOC?
How is it better than a Normal Mortgage!
It stands for Home Equity Line of Credit.
Phil explains benefits of a HELOC, what it is, how the five main banks all have options for it and call them different things. Plus, how a Home Equity Line of Credit with your mortgage can have great advantages.
So, let's lay out those answers more:
What is a Home Equity Line of Credit:
If you are not aware of what a Line of Credit is, basically instead of a loan where you owe interest on the full amount, it is a credit that you pay interest on only the amount that you use. For example, if you take out a loan from the bank for $1000 then you start to pay interest on $1000 but if you have a $1000 Line of Credit, and from that you only use $10 then you only pay interest on $10.
Home Equity refers to the equity or capital you have inside your home. So a Home Equity Line of Credit is a line of credit that the bank offers when they use your house as collateral for the funds you borrow.
What does a HELOC have to do with a Mortgage?
Well basically there is a hybrid version where you have a built in Line of Credit when you get your mortgage. This means that as you pay off your mortgage the amount available to borrow from the built in Line of Credit grows and is available to be used when you want.
What are the benefits of having a HELOC connected to your Mortgage?
There are some people that can walk into a bank and get money whenever they want and they have stable income, a stable job and their situation doesn't change. I don't know too many people like that, but there are some. For those people maybe it is better not to utilize their credit and just go to the bank as they are used to.
For the rest of us, when we NEED money from the bank, it is frustrating to get (sometimes impossible) and when things are going well the bank usually offers more credit to us and we don't want it.
So this option allows for someone to get their growing Line of Credit when they are approved for a mortgage (or when they have equity/capital in their home) and when their credit and everything may be doing well for them. Then later, life happens or opportunities come up and then the money is available when it is needed. Before that time if you don't use it then you don't pay interest.
The other advantage is that since the bank uses your home as collateral for the Home Equity Line of Credit, the interest rate will be a lot lower then if you have a normal line of credit.
If you have any other questions feel free to reach out.
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Derek is licensed for residential, commercial, and rural real estate, plus has many years of personal and business experience to be able to understand your needs.
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