Home Equity Lines of Credit – Pros and Cons of a HELOC

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Basics

The basics of a Home Equity Line of Credit (HELOC) are relatively simple to understand, and can present great opportunity for the home owner to capitalize off the increased value of the property. The HELOC is a credit line that is extended to the home owner, with the maximum available credit being a percentage of the difference between the outstanding mortgage and the appraised value of the house.

The HELOC is similar in nature to a credit card, where the home owner has a maximum amount he can spend, and will receive monthly bills for the money spent. These monthly bills increase as the available credit declines, and an interest rate is added to the outstanding balance. There is, however, one significant difference between a HELOC and a credit card that any home owner must understand, and it is that the credit line is secured by the property. This means that if the money is not repaid then the lender has the right to take possession of the property to recoup the money loaned.

Pros

Some of the benefits of a HELOC include the freedom to spend only what's necessary, a relatively simple approval process, and a line of credit that does not expire. Obtaining a HELOC typically does not take very long because banks are matched by the fact that the property is collateral. Additionally, lenders know that most home owners use a HELOC for improvements to the home or debt consolidation, both of which will indirectly benefit them. If the home owner makes improvements to the house, then its value should increase, thereby further protecting the lender's money. If the home owner consolidates personal debt, then he would likely have an easier time repaying a loan.

Cons

Some of the cons of a HELOC include potentially dramatic payment fluctuations, risk of foreclosure if payments are not made, and a decrease in net profit when the property is finally sold. Many banks offer HELOCs with variable interest rates, meaning that borrowers may see changes in their minimum monthly payments as a result of both their own spending and the lender's changing interest amounts.

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Source by CL Haehl

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